Combat Zone Exclusion
A member of the U.S. Armed Forces, who serves in a combat zone, can exclude certain pay from income. Generally, combat pay is not included in the individual’s pay reported on Form W-2.
Learn more about the combat zone exclusion below:
Excludable Pay
The amount excludable generally includes:
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Active duty pay earned in any month served in a combat zone.
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Imminent danger/hostile fire pay.
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A reenlistment bonus, if the voluntary extension or reenlistment occurs in a month served in a combat zone.
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Pay for accrued leave earned in any month served in a combat zone., The Department of Defense must determine that the unused leave was earned during that period.
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Pay received for duties as a member of the Armed Forces in clubs, messes, post and station theaters, and other non-appropriated fund activities., The pay must be earned in a month served in a combat zone.
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Awards for suggestions, inventions, or scientific achievements the service member is entitled to because of a submission made in a month served in a combat zone.
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Student loan repayments that are attributable to the period of service in a combat zone (provided a full year’s service is performed to earn the repayment).
Amount of Exclusion
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Enlisted Military - Enlisted members, warrant officers, or commissioned warrant officers are allowed to exclude their entire pay while serving in a combat zone., Any part of a month in a combat zone counts as an entire month., Periods hospitalized as the result of wounds, disease and injury in a combat zone are also excluded. Hospitalization beginning more than two years after combat activities cannot be excluded., Hospitalization need not be in the combat zone.
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Commissioned Officers - Commissioned officers may exclude pay; however, the amount of their exclusion is limited to the highest rate of enlisted pay (plus imminent danger/hostile fire pay received) for each month served in a combat zone or where hospitalized, as a result of service there.
Partial Month of Service
If service in a combat zone is for one or more days during a particular month, the service member is entitled to an exclusion for that entire month.
Combat Zones
A combat zone is any area the President of the United States designates by Executive Order as an area in which the U.S. Armed Forces are engaging or have engaged in combat. An area usually becomes a combat zone and ceases to be a combat zone on the dates the President designates by Executive Order.
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Afghanistan Area. By Executive Order No. 13239, Afghanistan (and airspace above) is designated as a combat zone beginning September 19, 2001. Since direct support of military operations in Afghanistan is provided in the following locations, service in these areas was designated as eligible for combat zone benefits effective December 14, 2001 (Notice 2002-17):
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Pakistán and Jordán
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Tajikistan, Uzbekistán, Kyrgyzstán (discontinued 5/31/2014*)
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Philippines (from January 9, 2002 through September 30, 2015).
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Djibouti (as of July 1, 2002).
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Yemen (as of April 10, 2002).
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Somalia and Syria (as of January 1, 2004).
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*Per IRS online correction to Pub 3 dated Mar 31, 2022
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The Kosovo Area. By Executive Order No. 13119 and Public Law 106–21, the following locations (including air space above) were designated as a combat zone and a qualified hazardous duty area beginning March 24, 1999.
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Serbia/Montenegro, Albania, Kosovo, The Adriatic Sea, The Ionian Sea—north of the 39th parallel, Airspace in connection with the operation
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Arabian Peninsula Areas. By Executive Order No. 12744, the following locations (and airspace above) were designated as a combat zone beginning January 17, 1991.
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The Persian Gulf, The Red Sea, The Gulf of Oman, Arabian Sea (part of), The Gulf of Aden, Iraq, Kuwait, Saudi Arabia, Oman, Bahrain, Qatar, United Arab Emirates.
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Jordan (certified by Dept. of Defense for combat zone tax benefits as of March 19, 2003).
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Lebanon (certified by Dept. of Defense for combat zone tax benefits as of Feb. 12, 2015).
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Sinai Peninsula – Retroactive designation – As of June 2015 (IR-2018-95) – see more below
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Turkey east of 33.51 degrees east longitude – as of September 19, 2016
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Treatment of Combat-Excluded Wages for Other Tax Considerations
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Child Credit - Excluded combat pay is treated as earned income for purposes of the refundable portion of the child credit for years other than 2021. For 2021 the refundable credit amount is not tied to earned income.
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Earned Income Tax Credit (EITC) - A taxpayer may elect to treat combat pay that is otherwise excluded from gross income as earned income for purposes of the EITC. The amount of the service member’s non-taxable combat pay should be shown on Form W-2, in box 12, with code Q. Making this election for EITC purposes may or may not be advantageous., If the taxpayer has earned income below the maximum amount of earned income on which the credit is calculated, including the combat pay will increase the credit amount., On the other hand, if the taxpayer’s earned income is already in the phase-out range, electing to include combat pay as earned income will decrease the amount of credit that can be claimed.
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IRA Contributions – Excluded combat pay is treated as if it were includible compensation for IRA purposes.