Combat Pay: When It’s Tax-free, When It’s Not and What the IRS Needs to Know for Your Tax Returns

The irony of tax-free pay is how much paperwork is involved.

Combat pay is a special type of income that is granted to military personnel who are either involved in direct combat or stationed in hazardous duty areas.

This type of compensation is considered to be tax-free under certain conditions.

However, the Internal Revenue Service (IRS) has specific rules and guidelines that determine what qualifies as combat pay for doing military duty and how it should be reported on military income tax returns.

Definition of Active Service for Military Income Taxes

Active service is an important term to understand when it comes to military income taxes. It refers to full-time duty in the armed services, which includes both active duty for training and regular active duty. However, attendance at a service school is not included as part of active service.

In addition, active service also covers those periods when retired individuals volunteer for active duty for training or other duties for the United States. This means that even retired military personnel can qualify as being in active service for tax purposes if they choose to perform specific duties.

Military service members may receive various types of pay, including basic pay, special pay, and allowances, among other forms of compensation. To properly classify their compensation for tax purposes, it’s necessary to determine whether they were on active service during the period they received those payments.

Understanding the definition of active service is key to determining the tax liability of military personnel. It is important to properly classify military compensation to ensure that all tax benefits, such as combat pay exclusions or income tax credits, are accurately applied.

Taxable Income for Military Personnel

Members of the armed services have a variety of pay and compensation options that can make determining their taxable income a bit complicated.

Basic pay, special pay, and allowances are all included in their taxable income and are subject to federal income tax. For those receiving hazardous duty pay, there are some special considerations.

Hazardous duty pay is typically given to military personnel who serve in locations or situations that pose significant risks, such as combat zones. This type of pay is also taxable, but there are some exceptions. Specifically, individuals who serve in certain designated combat zones can exclude their hazardous duty pay from their taxable income.

Combat pay is another form of military compensation that is subject to special tax treatment for members of the armed forces. Similar to hazardous duty pay, those who serve in combat zones can exclude at least part of their combat pay from their taxable income. However, this exclusion is limited to a specific amount depending on the year and is adjusted annually for inflation.

To determine what portion of their income is taxable, military personnel must report all their pay and allowances on their tax returns. 

Nontaxable Combat Pay

Nontaxable combat pay is a significant tax benefit available to military personnel who are engaged in actual combat operations. As defined by the IRS, military income earned during active combat is generally tax-free. This means that service members can exclude certain types of combat pay from their taxable income, thereby reducing their tax liability on their federal returns.

To be eligible for this tax benefit, servicemembers must have received hostile fire pay, engaged in a combat operation, or served in a combat zone. Hostile fire pay is provided to individuals who are subject to hostile fire or imminent danger pay, while combat pay is given to those who engage in direct combat with enemy forces.

The definition of “active combat” is quite specific and may require consultation with a qualified tax professional. Generally speaking, active combat is defined as a situation in which a military service member is subject to hostile action by an enemy of the United States or is engaging in direct combat with enemy forces. This can include ground operations, air combat, or naval engagements.

Those who are actively engaged in combat operations can exclude their nontaxable combat pay from their taxable income for federal income tax purposes. This tax benefit applies to both regular military pay and any special pay or allowances that are received during a period of active combat.

It’s important to note that nontaxable combat pay does not apply to all types of military service. Servicemembers who are providing support functions or who are not directly engaged in combat operations may not be eligible for this tax benefit. Additionally, other types of income earned during active duty (such as rental property income or student loan repayments) may still be subject to federal income taxes.

To claim nontaxable combat pay, servicemembers must report their income on their federal tax returns using the appropriate forms and documentation. This may include a Military Leave and Earnings Statement (LES), Form W-2 for special pay or allowances, or other documentation showing the amount of nontaxable combat pay that was received during a period of active combat.

Joint Return Considerations

When it comes to filing taxes, service members and their families have unique considerations to keep in mind. One of these considerations is whether they should file jointly or separately. While filing separately may make sense in certain situations, joint returns can offer certain tax benefits that can be especially helpful for military spouses who may also be earning an income.

For active duty service members, there are specific rules surrounding the joint return filing status. Both spouses must agree to filing a joint return, and the active duty service member must be in legitimate active service when the return is filed. This means that if the service member is deployed or otherwise on active duty in a different location, they may need to sign and file a power of attorney in order for their spouse to represent them in the tax process.

Additionally, if one spouse is not present in the U.S. during tax season, an extension period may be granted. This can be particularly helpful for military families who may be stationed abroad or who are experiencing a deployment or other separation. By filing jointly, these families can take advantage of certain tax benefits and potentially reduce their overall tax liability.

39th Parallel and Degrees East Longitude Requirement

The 39th Parallel and Degrees East Longitude Requirement are used by the U.S. government to determine eligibility for combat pay exclusions for service members. Specifically, these geographic points are used to define certain areas of combat zones, such as the Persian Gulf and the Ionian Sea.

The IRS defines a combat zone as an area in which the U.S. is engaging in military operations, which includes areas right outside the combat zone, an area that is declared imminent or in direct support of military operations. For service members who serve in a designated combat zone for either a partial or an entire month, combat pay exclusions are available.

The 39th Parallel is a circle of latitude that is an imaginary line that is located approximately 39 degrees north of the Earth’s equator. The Degrees East Longitude is an imaginary line located east of the Prime Meridian, which is located in Greenwich, England. Together, these two points work to define certain areas of combat zones for tax purposes.

For service members who are serving in these designated combat zones, including those in areas around the 39th parallel and along specified Degrees East Longitudes, combat pay can be excluded from taxable income when filing their income tax returns with the Internal Revenue Service. 

Benefits Exempt from Taxation

Members of the armed forces can claim various tax benefits related to their service, including certain benefits that are exempt from taxation. While some tax rules apply to all military personnel, others depend on the service member’s status, where they serve, and how long they serve. These tax benefits highlight the government’s recognition of the sacrifices military service personnel make to defend their country. 

Entire Month in a Combat Zone

Active duty military service members who spend an entire month in a designated combat zone may receive tax-free income for that month. 

A combat zone is an area where military personnel are actively engaged in combat or provide direct support to those who are. This includes areas that are contiguous to the combat zone, such as airspace and waterways. Additionally, geographic locations classified by the Department of Defense as a combat zone also qualify.

To claim the tax exclusion for an entire month spent in a combat zone, the service member must submit certain documents to the IRS. These documents include orders that detail the dates of service and location, and a letter from the commanding officer certifying that the service member served in the designated combat zone for the entire month.

Arming/Dequipping Days in a Combat Zone

When a member of the armed forces enters or exits a combat zone, they may have partial days of arming or dequipping that can affect their income taxes. Arming or dequipping days refer to the days a service member spends preparing for or returning from active duty in the combat zone. These days are important to accurately calculate as they can impact the amount of nontaxable combat pay a service member may be eligible for.e

To calculate arming/dequipping days, the service member and their commanding officer must keep track of the specific dates and times of when the service member enters and exits the combat zone.

The Internal Revenue Service (IRS) considers any date that a service member is present in the combat zone, including arming and dequipping days, as a day of service in the combat zone.

It is important to accurately calculate these days to ensure that the correct amount of combat pay exclusion is used on the service member’s tax return. The combat pay exclusion allows a service member to exclude from taxable income any compensation received for active service in a combat zone or contingency operation.

Travel to/from a Combat Zone for Active Duty

One of the primary tax benefits for active duty service members traveling to and from a combat zone is an extension of time to file and pay their taxes. Extended tax deadlines mean that service members who are deployed to a combat zone can request an extension to file their tax return and pay any taxes owed. However, this does not include travel for personal convenience. 

The extension period typically lasts for 180 days after the individual returns from the combat zone. During this period, service members will not be charged penalties for failure to file, pay, or deposit taxes.

Hazardous Duty Pay and Social Security Benefits for Military Personnel

Hazardous duty pay is extra compensation given to military personnel for performing dangerous duties or serving in combat zones. There are several types of hazardous duty pay recognized by the IRS. These include combat pay, hazardous duty pay, and imminent danger pay.

Combat pay is given to service members who serve in designated combat zones or during military operations that involve combat. Hazardous duty pay is given for duties that are especially dangerous, such as handling explosives or working with hazardous materials. Imminent danger pay is given to service members who serve in areas where they are at a high risk of harm, such as the Persian Gulf or portions of the Ionian Sea.

When hazardous duty pay is received, it is subject to federal income tax but exempt from Social Security and Medicare taxes. This means that service members will not pay Social Security taxes on the hazardous duty pay they receive. However, Social Security benefits are based on the amount of income earned during a person’s working years. Since hazardous duty pay is exempt from Social Security taxes, it reduces the amount of income that is used to calculate Social Security benefits.

While hazardous duty pay can reduce Social Security benefits, it is important to note that it can also boost retirement savings. Since hazardous duty pay is exempt from Social Security taxes, it means that members of the armed forces can invest more money in retirement plans, such as the Thrift Savings Plan (TSP), which can help to supplement any reduction in Social Security benefits.

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