I recently had to look some information up for my son who is in the Navy and I thought I would share what I found with you. In general, members of the US Armed Forces (including activated reservists, National Guard & Coast Guard members but not the Merchant Marine) who serve in a combat zone can exclude certain pay from income. Amounts excluded from income are not subject to federal income tax. Personally I think it is a little goofy that military personnel have to pay tax on their wages anyway. They don’t get paid nearly enough to put their life on the line, and yet they are proud of what they do and don’t do it for the pay. So I think they should be given a break and not have to pay tax. Maybe that is what the IRS is trying to do with the rules for combat pay.
Non-officers, enlisted personnel, warrant officers & commissioned warrant officers can exclude as income:
• Active duty pay earned in any month served in a combat zone
• Imminent danger/hostile fire pay & military pay earned while hospitalized as a result of wounds, disease or injury incurred in the combat zone
• A reenlistment bonus if the voluntary extension or reenlistment occurs in a month served in a combat zone
• Pay for accrued leave earned in any month served in a combat zone
• Pay received for duties as a member of the Armed Forces in clubs, messes, post & station theatres and other non-appropriated fund activities earned in a month served in a combat zone
• Awards received for suggestions, inventions or scientific achievements because of a submission made in a month in a combat zone
The exclusions listed above apply to officers but are limited to the highest rate of enlisted pay for each month during any part of which officers serviced in a combat zone. For 2009, the most a commissioned officer can earn tax free each month is $7,368.30.
You do not need to claim the combat zone exclusion on your tax return because this type of income is excluded from wages and not reported on the Armed Forces members W-2. The wages shown in box 1 of the W-2 should not include military pay excluded from income under the combat zone exclusion provisions. If it does, a corrected W-2 will need to be issued. It is important to note that combat zone pay is subject to Social Security and Medicare taxes.
The IRS will also automatically extend the filing deadline for those serving in a combat zone. The extension is extended to 180 days beyond the period of service in the combat zone. To inform the IRS about this special status you must write “COMBAT ZONE” and the deployment date in red at the top of your tax return. If you are covered by this automatic extension of time and receive a notice from the IRS you should return the notice to the IRS with the words “COMBAT ZONE” and the deployment date in red written at the top of the notice and on the envelope.