What Counts as Combat Pay
Combat pay is the military pay you earn while serving in a qualifying area. When pay is “excluded,” it isn’t counted as taxable income on your federal return, so you don’t owe income tax on it.
Where You Need to Serve
The IRS armed forces guide says your service must fall into one of these areas:
- A combat zone the President designates by Executive order
- A qualified hazardous duty area Congress designates, as long as you receive hostile fire or imminent danger pay
Service outside these areas can also qualify if the Department of Defense certifies it as direct support of combat zone operations and the service qualifies you for hostile fire or imminent danger pay. The IRS keeps an official list of combat zones you can check. Serving even one day in a month counts as serving the full month.
Pay That Qualifies
You can exclude these types of pay:
- Active-duty pay for any month you served in a combat zone
- Imminent danger or hostile fire pay
- Reenlistment or continuation bonuses, if the reenlistment or extension happens in a month you served in a combat zone
- Pay for accrued leave you sold, if you earned that leave in a month you served in a combat zone
- Awards for suggestions you submitted while in a combat zone
Retirement pay and pensions don’t qualify. Differential wage payments from a civilian employer are also taxable, even if you served in a combat zone.
If You’re Hospitalized
If you’re hospitalized for a wound, disease or injury from combat zone service, your pay stays excluded during the hospital stay. This applies even after you leave the zone. The exclusion stops for any month that begins more than two years after combat activities in that zone end.
Combat Pay Limits by Rank
How much you can exclude depends on your rank.
| Rank | How much combat pay you can exclude |
|---|---|
| Enlisted members | All of it |
| Warrant officers and commissioned warrant officers | All of it |
| Commissioned officers | Up to the highest enlisted pay rate plus any imminent danger or hostile fire pay, per month |
The officer limit is adjusted each year, so the exact dollar amount changes over time.
Where Nontaxable Combat Pay Shows Up on Your W-2
Your Form W-2 is the yearly statement showing your pay and the taxes withheld from it. Because combat pay is excluded from income tax, it shouldn’t appear in box 1, which reports your taxable wages. If it does, ask your finance office for a corrected W-2.
Box 12 with code Q shows the amount of nontaxable combat pay you received. You’ll still see Social Security and Medicare taxes withheld, since combat pay remains subject to both.
How Combat Pay Affects Tax Credits and IRA Contributions
Excluded pay can still matter elsewhere on your return. Tax credits reduce the tax you owe, and some depend on your earned income (money you get from working, like wages).
Earned Income Tax Credit
The earned income tax credit, or EITC, is a credit for workers with lower to moderate income. You can choose to count your nontaxable combat pay as earned income for the EITC. If you do, you must include all of it. On a joint return, you and your spouse each decide separately. If you make the election, nontaxable combat pay is reported on line 1i of Form 1040 or 1040-SR.
IRA Contributions
An individual retirement account (IRA) is a savings account with tax advantages for retirement. You can generally contribute only up to the amount of your compensation for the year. Nontaxable combat pay counts as compensation, so it can help you contribute even when your taxable pay is low.
Extra Time for Tax Deadlines
Your federal tax deadlines are extended while you serve in a combat zone or contingency operation. The extension covers your time in the zone plus 180 days after your last day there, plus any days you had left to file or act when you entered the zone.
If you were hospitalized for a combat injury, the 180 days start after your last day of continuous qualified hospitalization, the later of your last day in the zone or the last day of your continuous qualified hospitalization. Qualified hospitalization means any hospitalization outside the U.S. and up to five years of hospitalization in the U.S. Spouses can receive most of the same extensions.
