What is a combat zone?
A combat zone is designated as a war zone for a specified period with the aim of reporting to the Internal Revenue Service by military personnel. While serving in a combat zone, military members enjoy various tax benefits.
Points to note
In 2020, the United States had four active combat zones: the Sinai Peninsula, Afghanistan, Kosovo, and the Arabian Peninsula.
A combat zone is a place designated as a war zone for a period with the aim of reporting to the Internal Revenue Service by military personnel.
Military Personnel can exclude from gross income reporting to the IRS while serving in a combat zone.
While serving in a combat zone, members of the military enjoy various tax benefits.
Understanding a combat zone
The IRS formally defines a combat zone as an area that the President of USA designates by Executive Order as a zone in which the United States military is engaged or has engaged in combat. A combat zone generally becomes a combat zone and stops being one on the dates that the President will designate by decree.
Military members can exclude any compensation earned while serving in a combat zone from the IRS gross income report. They can also exclude pay for accrued leave, re-enlisting bonuses, and miscellaneous items (e.g., rewards) received during periods in a combat zone. However, the exclusion value is limited to the highest payment rate plus the "imminent danger/hostile fire" payment for each month during any period that the military personnel served in a combat zone or were hospitalized because of the service in a region.
If you are a qualified member who served in a combat zone, the IRS may exclude your income from taxes.
Requirements to qualify for a combat zone exclusion
Must be a member of the United States Army.
Entitlement to compensation must have been fully vested within the month when the member served in a designated combat zone or was hospitalized due to injury, illness, or suffered while serving in a designated combat zone.
Actions Required
No action is required to receive the exclusion. Each military organization automatically certifies your entitlement, excluding income to be declared on the W-2. If you believe you are eligible and your W-2 reflects your full, unadjusted annual salary and benefits, contact your military payments office to issue a corrected W-2.
Provisions for Combat Zone Exclusions
Excluding income
You can exclude the following gain related to military compensation: Basic payment for all the months you are present in a combat zone.
Imminent danger / Pay for hostile fires: you can exclude all these entries.
Leave benefits: you can exclude the proceeds from the accrued leave's sale while in a combat zone.
Re-enlistment or continuation bonus: you can exclude this income if the re-enlistment or the contractual agreement's execution for the service's continuation took place. At the same time, you were present in a combat zone.
Rewards and other financial incentives: You can exclude income associated with introductions made during a combat zone.
School Loan Repayment: You can exclude a portion of the repayment associated with the months you were in a combat zone. For example, if it takes a year to get a refund and you end six of those months in a zone, you can eliminate half of your refund income.
Non-Excludable Taxes
Military payments to be earned in a combat zone are subject to Social Security and Medicare taxes, and it will appear on your W-2.
Period Covered
You will receive exclusions for the months you served in a combat zone, including part-time service. One day served in a combat zone during a month is considered a full month.
Limits
The following limits are imposed on you:
Commissioned officers: limited to the highest enlistment payment rate, plus imminent/hostile danger payment for each month present in a combat zone.
Commissioned Warrant Officers: can exclude all military payments for each month present in a combat zone.
Enlisted Members: You can exclude all military payments for each month in a combat zone.
Warrant Officers: You can exclude all military charges for each month present in a combat zone.
Married Personnel
The following exclusion combinations are allowed:
Both are military and operate in the combat zone: both can benefit from a tax exclusion for the months they have been in the combat zone.
Both are military, and one served in the combat zone: the spouse who served in the combat zone can benefit from a tax exclusion for the months in which they were present in the combat zone.
One is military and served in the combat zone: the spouse who served in the combat zone can benefit from tax exclusion for the months they were present in the combat zone.
Hospitalization
Military allowances obtained during hospitalization (inside or outside a combat zone) due to wounds, illnesses, or injuries sustained in a combat zone may be excluded. If a member of the military is hospitalized for a part of the month due to wounds, injury, or illness sustained while serving in that zone, the member is entitled to exclusion for the entire month. Military payment received for hospitalization of more than two years from the last month of presence in the combat zone is not excluded.
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