Find out what types of combat pay are exempt from U.S. income tax. Learn about what qualifies as a combat zone and the limits on how much can be excluded from taxation.
Generally, tax is imposed on all income received from worldwide sources by citizens of the United States unless specifically excluded by law. This law equally applies to members of the U.S. Armed Forces; however, there are certain exclusions from tax for members who receive combat pay.
United States Armed Forces Members
For United States income tax purposes, the U.S. Armed Forces includes all officers (both commissioned and warrant) as well as all enlisted personnel serving in regular or reserve units falling under control of the Department of Defense (i.e., Army, Navy, Marines, and Air Force). Additionally, the term Armed Forces includes (for tax purposes) the U.S. Coast Guard.
Military Pay and Allowances
Members of the U.S. Armed Forces are eligible to receive many different types of pay, allowances, and benefits. Many of the allowances and benefits are exempt from taxation; however, most types of pay are subject to tax unless the member is serving in a recognized combat zone.
Recognized Military Combat Zones
A combat zone is an area designated by a Presidential Executive Order in which the U.S. Armed Forces are engaged or have been engaged in combat. Currently, there are three recognized combat zone. Those combat zones are as follows:
- Afghanistan Area - Includes Pakistan, Tajikistan, Jordan, Incirlik Air Base, Turkey, Kyrgyzstan, Uzbekistan, Yemen, Djibouti, Somalia, and limited parts of the Philippines
- Kosovo Area – Includes the Federal Republic of Yugoslavia (Serbia/Montenegro), Albania, the Adriatic Sea, and the Ionian Sea (north of the 39th parallel)
- Persian Gulf Area – Includes Iraq, Kuwait, Saudi Arabia, Oman, Bahrain, Qatar, the United Arab Emirates, the Red Sea, the Gulf of Oman, the Gulf of Aden, and the part of the Arabian Sea that is north of 10 degrees north latitude and west of 68 degrees east longitude
Serving in a Combat Zone
Armed Forces members are considered to be serving in a combat zone if they are either assigned to official duty to a combat zone of if they qualify for special hostile fire/imminent danger pay while in a combat zone. Absences due to sickness, injury, or leave do not preclude a member from being considered to be providing services in a combat zone.
Tax Exclusion for Combat Pay
The tax exclusion for combat pay may be limited for certain members depending on their military rank. Enlisted members, warrant officers, and commissioned warrant officers serving in a combat zone for any part of a month can exclude all military pay for that month. However, commissioned officers (other than commissioned warrant officers) are limited on how much is eligible to be excluded from taxation. Their exclusion is limited to the highest rate of enlisted pay (plus imminent danger/hostile fire pay received by the member) for each month during which any part of the month was spent serving in a combat zone.
Hospitalization While Serving in a Combat Zone
The exclusion extends to all military pay earned (within certain time limits) while hospitalized as a result of disease or injury incurred in the combat zone although treatment can take place outside the combat zone.
Related Articles/References:
IRS Publication 3 – Armed Forces’ Tax Guide
The information contained within this article is for general guidance only. As such, it should not be used as a substitute for consulting with professional accounting, tax, legal or other competent advisers.
Lauren Massie - “There is no knowledge that is not power” ~ Ralph Waldo Emerson
