Who Qualifies for the Combat Zone Tax Exclusion
You qualify when you serve in an area the IRS recognizes and receive hostile fire or imminent danger pay. That is special pay the Department of Defense certifies for duty in dangerous areas.
Areas That Count
According to IRS Publication 3, the IRS guide for military members, three types of areas qualify:
- An area the President designates as a combat zone by executive order
- A qualified hazardous duty area that Congress designates
- An area outside a combat zone that the Department of Defense certifies as directly supporting combat operations
The list changes, so check the IRS combat zones list for current areas.
Situations That Don’t Count
Your presence in the area has to be part of your duty. These don’t qualify:
- Passing over or through a combat zone on a trip between two points outside it
- Visiting a combat zone while on leave from a duty station outside it
- Being in a combat zone only for your personal convenience
- Receiving retirement pay or pensions
How Much Combat Pay You Can Exclude
| Your rank | What you can exclude |
|---|---|
| Enlisted member | All combat zone pay |
| Warrant officer or commissioned warrant officer | All combat zone pay |
| Commissioned officer (other than a commissioned warrant officer) | Up to the highest enlisted pay rate, plus any imminent danger or hostile fire pay you received, for each month |
Publication 3 lists the officer cap’s dollar amount for each tax year.
What Counts as Combat Pay
Qualifying pay includes basic pay and imminent danger or hostile fire pay. It also includes reenlistment bonuses if you reenlist in the zone, plus pay for leave you earned there.
Partial Months and Hospital Stays
Serving in a combat zone for even one day in a month makes that whole month’s pay qualify. If you’re hospitalized for a combat zone injury, the exclusion continues. Under the IRS combat service rules, it ends for hospital pay received more than two years after your last month in the zone.
How the Exclusion Shows Up on Your W-2
Your military payroll usually applies the exclusion for you, and it shows on your W-2. When you read your W-2, look for these signs:
- Box 1, which shows your taxable wages, shouldn’t include excluded combat pay.
- Box 12 with code Q shows your nontaxable combat pay.
- If box 1 includes your combat pay, ask your finance office for a corrected W-2.
How Combat Pay Affects Tax Credits and Savings
Combat pay can also change other parts of your return.
The Earned Income Tax Credit
The Earned Income Tax Credit (EITC) is a credit for workers with lower incomes. You can choose to count nontaxable combat pay as earned income for the EITC. Doing so may raise or lower your credit, so figure it both ways before you decide.
If you choose to count it, you have to include all of it. If you file jointly and both spouses receive combat pay, each of you makes your own choice.
IRA Contributions
Nontaxable combat pay counts as compensation when you figure out your limit for an IRA (individual retirement account) contribution.
Extra Time to File and Pay Your Taxes
Your deadline to file, pay, claim a refund, or make IRA contributions gets pushed back in two steps:
- You get 180 days after you leave the combat zone or a qualifying hospital stay.
- You add the number of days you had left to act when you entered the zone.
Spouses generally get the same extra time, with two exceptions spelled out in Publication 3. The IRS charges no penalties or interest during this period. This relief is separate from standard tax extensions most filers use.
Expecting a refund? Filing early can get it to you sooner.
