Combat Pay, Tax Style: Benefits When Serving in a Hot Zone
Generally, any form of military pay earned while on deployment in a combat zone is excluded from federal income tax. This translates to a significant tax savings for the active service member in combat and his family back home.
Key Takeaways
- Members of the U.S armed forces are eligible for various tax benefits that can increase their net take-home pay compared with civilians, such as tax-exempt housing and food allowances.
- Any form of pay earned by enlisted members and warrant officers while on deployment in a combat zone is excluded from federal income tax.
- Re-enlistment bonuses, medical or dental pay, special assignment pay, hardship duty pay, foreign language pay, flight pay, and sea pay are all excluded from federal income tax if you served in a combat zone for even one day during the month of payment.
- Although any base pay earned by a member of the armed services while serving in a combat zone is excluded from federal income tax, it is still subject to Social Security tax and Medicare tax.
Military benefits
Members of the armed services are eligible for various tax benefits that can increase their net take-home pay compared with civilians, such as tax-exempt allowances for housing and food, which can make up approximately 30% of a service member's total compensation, and the combat pay tax exclusion.
Any form of pay earned while on deployment in a combat zone is excluded from federal income tax. This translates to a significant tax savings for the active service member in combat and his family back home.
Combat zone
When a member of the military is serving in an area designated by the Department of Defense as a combat zone or is serving in direct support of military operations in the combat zone, their income during that period will generally qualify to be excluded from federal income tax.
Combat pay tax exclusion
Although any base pay earned by a member of the armed services while serving in a combat zone is excluded from federal income tax, it is still subject to Social Security tax and Medicare tax.
- For enlisted service members, the amount of the exclusion from federal income tax is unlimited.
- For officers, the exclusion is limited to the maximum amount of enlisted pay.
- States vary on whether or not the federal combat pay tax exclusion applies to state income taxes.
Other excluded pay
The combat pay tax exclusion also applies to other types of pay earned by a military service member during the same month as when serving in a designated combat zone. Most notably, this includes re-enlistment bonuses, which can mean a large amount of pay will be sheltered from federal income tax for the benefit of the enlisted service member and his family.
For officers, various types of special pay that depend on their career path or service location are excluded from federal income tax during their period of service in a combat zone, such as:
- medical or dental pay
- special assignment pay
- hardship duty pay
- foreign language pay
- flight pay
- sea pay
Value of tax exclusion benefit
Like other tax benefits, the combat pay tax exclusion is of significant financial value to the member of the armed services as a taxpayer.
For example,
- If a member of the armed services is deployed to a combat zone for six months, half of their annual base pay is excluded from federal income tax.
- In practical terms, this could mean excluding $15,000 to $20,000 of pay from tax.
- An enlisted member with a 12% marginal tax rate would save in excess of $2,000 in federal income tax.
Tax debt forgiveness
If a member of the armed services should be killed in action while deployed in a combat zone, or die later from injuries sustained while in a combat zone, their surviving family can make a special request with the IRS for forgiveness of the member's outstanding federal income tax debt. This tax relief also can apply to obtaining a refund for the surviving family if taxes were already paid.
TurboTax Tip:
Enlisted active duty and reserve military members can file free federal and state taxes with TurboTax Online using the TurboTax Military Discount.
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