Combat Zone Tax Tips

If you're a member of the U.S. Armed Forces who serves in a combat zone, you can exclude certain pay from your income. You also have additional time to make a qualified contribution to an IRA. A combat zone is an area designated by the U.S. President by Executive Order as an area in which U.S. Armed Forces are engaging in or have engaged in combat.

Income

The following income received during service in a combat zone doesn’t have to be reported as gross income:

active duty pay earned in any month served in a combat zone

imminent danger/hostile fire pay during a month served in a combat zone

re-enlistment bonus if re-enlistment or voluntary extension occurs during a month served in a combat zone

Pay for accrued leave — the Department of Defense must determine the unused leave was earned during the month served in a combat zone

pay for duties as a member of the Armed Forces in clubs, messes, post and station theaters, and

other non-appropriated fund activities earned during a month served in a combat zone

awards or achievement pay made for a suggestion or achievement made in a month served in a combat zone

student loan repayments to the extent service in the year of service required to earn the repayment was performed in a combat zone

(New for 2008) Bonus payments by a state or local government entity to a member or former member of the armed forces, if the payment is made solely because of service in a combat zone If you're a commissioned officer (other than a commissioned warrant officer), the combat pay exclusion for any month is limited to the highest rate on enlisted pay (plus hostile fire/imminent danger pay, if any).

You do not claim an exclusion for combat pay on your tax return. The excludable amount should not be included in your Box 1 wages on Form W-2. If an excludable amount is included in your Box 1 wages, you should get a corrected Form W-2. If you served in a combat zone for 1 or more days during a particular month, you’re allowed the above exclusions for that entire month.

Combat zone service includes any periods you are absent from duty due to illness, wounds or leave. A person is considered to be serving in a combat zone if he or she becomes a prisoner of war or is missing in action if that status is kept for military pay purposes.

You can also exclude military pay earned while hospitalized (you don’t have to be hospitalized in the combat zone). Your hospitalization must be due to having served in a combat zone. This is true even if you’re hospitalized after combat zone service.

Combat Zone Considerations

Military service outside the combat zone is, for tax purposes, considered to be inside a combat zone if the service is in direct support of combat zone military operations and the service qualifies you for special military pay for duty subject to hostile fire or imminent danger. But in these situations, you're not considered to be in a combat zone:

You're present in a combat zone during leave from a duty station located outside the combat zone.
You pass over or through a combat zone during a trip between 2 points that are outside a combat zone.
You’re in a combat zone only for your personal convenience.

H&R Block's Military Web Site
Military Income Inclusions
Military Income Exclusions
Military Moving Expenses
Military Extensions

Economic Stimulus Payments for Military Combat Personnel

This information is for military personnel who are serving in combat zones.

For federal tax purposes, the U.S. Armed Forces includes officers and enlisted personnel in all regular and reserve units controlled by the Secretaries of Defense, the Army, Navy and Air Force. The Coast Guard and National Guard are also included, but not the U.S. Merchant Marine or the American Red Cross.

Normally, combat pay is not counted as income and is not taxable. For the purposes of receiving an economic stimulus payment, however, military personnel serving in combat zones have the option of including their nontaxable combat pay on their 2007 or 2008 income tax returns if it helps their eligibility for the 2008 economic stimulus payments.

To receive the stimulus payment this year, combat zone personnel or their spouses must file a tax year 2007 income tax return by Oct. 15, 2008. Otherwise, they can claim the economic stimulus payment on next year’s income tax return.

Military personnel who normally would not file an income tax return because their 2007 income is not taxable can file a simple Form 1040A with the IRS if they want to receive the economic stimulus payment. They should report their nontaxable combat pay on line 40b of the Form 1040A to show at least $3,000 in qualifying income. The Department of Defense lists the amount of excluded combat pay, along with the designation, “Code Q,” in box 12 of Form W-2.

The IRS has developed Package 1040A-3, an 8-page publication containing tax tips, a sample Form 1040A and a blank Form 1040A. The package contains everything needed to file the return immediately.

Package 1040A-3 , 8-page information package

Basic Eligibility Requirements

You have, or your family has, at least $3,000 in qualifying income from, or in combination with, Social Security benefits, certain Veterans Affairs benefits, Railroad Retirement benefits and earned income. Supplemental Security Income (SSI) does not count as qualifying income for the stimulus payment.

You are not a dependent or eligible to be a dependent on someone else’s federal tax return. (The same must be true of any family members claimed on your return.)

Due to a new law change, the spouses and children of married military personnel are not required to have valid Social Security Numbers.

To Claim Your Payment

If you normally don’t file a federal tax return but must file one this year solely to claim your economic stimulus payment, you should file by Oct. 15, 2008, to ensure that you receive the payment this year. Find out where to send your tax return.

It will generally take a minimum of eight weeks after you file your return to get your stimulus payment.

Free Tax Help Available

Individuals who need to file a return this year to receive a stimulus payment may be able to take advantage of free tax preparation sites nationwide for low-income and older taxpayers.

Free File - Economic Stimulus Payment provides free tax preparation software and electronic filing for people who are submitting a return solely to receive their economic stimulus payment

The Volunteer Income Tax Assistance (VITA) program provides help to low- and moderate-income taxpayers. Call 1-800-906-9887 to locate the nearest VITA site.

IRS employees will help prepare Form 1040A returns for low-income workers, retirees, disabled veterans and others at IRS Taxpayer Assistance Centers. For a list of centers in your state and their hours of operation, Contact My Local Office.

Related Items:

IR-2008-48, Combat Pay Can Count toward Economic Stimulus Payment Eligibility
New Law: Additional Military Families to Get Stimulus Payments This Fall
Basic Information about Economic Stimulus Payments
Frequently Asked Questions
Tax Information for Members of the U.S. Armed Forces