The Complete Military Combat Pay Tax Guide

A Taxpayer’s Guide To Combat Pay In The United States Military

Feb 25, 2022 |

Members of the military have their own set of issues when it comes to filing taxes. Often soldiers move from place to place and are required to file a number of different returns. And military members generally face differing requirements when it comes to reporting of income.

Military members may receive combat pay, and they also may receive regular income. Members do not need to report the combat pay as income. Whether receiving combat pay or regular income, it is important to know how much money the military withholds from income when it comes to filing tax returns.

Members of the armed forces are entitled to tax benefits such as tax-free food and housing allowances that boost their net pay. They amount to substantial tax savings for active-duty members in combat and their families at home.

A military member who serves in a conflict zone recognized by the Department of Defense (DOD) or directly supporting military activities in a combat zone is usually exempt from federal income tax during that period. The DOD gives combat pay to service members serving in areas designated as hazard zones. This guide will explore various forms of combat pay and their tax implications.>

Table of Contents

The Basics of Combat Pay

Combat pay is $225 per month as of 2021, which is added to the soldier’s basic salary. The basic pay rate is determined by the member’s rank and years of service in the military.

The practice of rewarding higher risk with additional compensation dates to the Second World War. The military implemented it to boost morale and increase retention among the soldiers. The DOD reauthorized combat pay under the term “Hostile Fire Pay” in 1963.

Other Forms of Payment for Military Members

When service members with dependents are separated from their families for more than 30 days, as often happens when they’re involved in combat, they are entitled to an additional monthly Family Separation Allowance (FSA). FSA pay is also exempt from federal income tax.

Countries Listed as Combat Zones

The U.S. publishes a list of the areas it considers combat zones. It is not actively engaged in battle in all the countries on the list; some are areas of combat support and emergency operations. The list as of October 2021 includes:

Afghanistan
Jordan
Djibouti
Yemen
Somalia
Syria
Kyrgyzstan
Pakistan
Tajikistan
Philippines
Persian Gulf
Yugoslavia
Albania
Kosovo
Adriatic Sea
Red Sea
Iraq
Kuwait
Saudi Arabia
Oman
Bahrain
Qatar
The United Arab Emirates

Soldiers serving in these areas are eligible for combat pay in most cases. They should address any questions to their unit commander.

Excludable Military Income

There are several aspects of military compensation that have special tax status. The following military compensation income is exempt from income taxes:

Basic Pay

You will receive payment in full for each month you are stationed in a conflict zone, without taxes.

Soldiers who reenlist or sign a valid contract for continuous service while in a combat zone can exclude this income from their taxes.

School Loan Repayments

You may be able to deduct a portion of a school loan repayment for the months you were stationed in a combat zone. One year’s compensation allows you to deduct half the repayment income when you spend six of those months in a battle zone.

Leave Benefits

Income earned from selling accrued leave while in a combat zone can be excluded.

Awards or Other Financial Incentives

You can exclude related income for any awards or other such compensation earned in a combat zone.

Spouses in Combat Zones

The tax exclusions apply to spouses of service members as well. Those who accompanied a spouse who served in a conflict zone are eligible for the tax exclusion for the months they were stationed there.

Health Issues

There are also provisions for members of the military suffering from health issues. Military compensation earned while hospitalized (in or out of a combat zone) due to injuries, disease, or disability suffered in a combat zone can be excluded.

A service member hospitalized for a fraction of a month is entitled to the whole month’s exclusion. Military pay for hospitalization that lasts longer than two years from the last month of combat deployment is not excluded, however.

Non-Excludable Taxes

Military income earned in a war zone is subject to Social Security and Medicare taxes, which must be reported on your W-2.

The IRS also exempts compensation for partial months spent in a combat zone. A month is defined as one or more days spent in the combat zone in any given month.

When to File

The IRS allows military members stationed overseas for an extended length of time that coincides with Tax Day (typically April 15) an automatic two-month extension to file and pay any taxes owed. A due date that falls on a weekend or legal holiday will be moved to the next working day.

Service members typically have 180 days to file and pay their taxes after leaving the combat zone. The DOD can extend that if it deems that the soldier is affected by a president-declared catastrophe, a terrorist situation, or another military-related activity. You may have up to a year after the due date to file and pay the taxes in these cases, depending on the DOD’s determinations.

How to File for Combat Pay

The DOD fortunately makes it easy for soldiers to deduct combat pay – they shouldn’t have to do anything on their taxes to receive the exclusion. Each military unit automatically verifies the entitlement by excluding eligible income from your W-2. Request a rectified W-2 from your military unit office if you believe you’re eligible and your W-2 shows your full, unadjusted annual pay and benefits.

Figuring out residency

Since military members frequently are reassigned to different posts, it’s important to take into account state taxes for the new state which you reside. Do not assume that requirements will be the same as the prior state you resided in. For example, there are a handful of states that have no state income tax; such as Florida and Texas.

Deciding upon the right place of residence also has other financial complications specific to military members. Besides understanding the tax rates of various states, military members often may need to consider where they wish to retire or whether they wish for their children to attend a particular state college. Residency in a particular state may impact retirement income and tuition reimbursement.

Other tax and financial considerations

There are several other considerations military members need to make as well when it comes to filing taxes. When one or more spouse is a member of the military, there may be additional complications.

Deadlines for filing taxes may be different for those in combat zones. Under such circumstances, the soldier may wish to qualify for certain extensions.

Finally, it’s important for military members to take advantage of every expense for which they are eligible. This is especially important when it comes to moving expenses.

Obviously, such differences when it comes to reporting mean that extensive tax planning is in order. Even members of the military should be wary of the power of the IRS when it comes to matters involving unfiled or uncollected tax revenue.

Military families have enough to worry about without having to face tax penalties and fines due to inaccurate tax returns. Attorney representation for such members can thus be extremely helpful.

Forgiveness of Tax Debt

The IRS also makes allowances for a service member who dies in combat or from injuries incurred in a listed combat area. The soldier’s surviving family can request IRS forgiveness of their outstanding income tax debt in such cases. The family can file for a refund if the taxes have already been paid.

Soldiers in combat zones should be able to focus on their safety and their mission instead of worrying about tax issues. A tax advisor is a great resource to smooth out any complications that might arise.