This post will discuss which income items received by current and former members of the U.S. Armed Forces are reported on a tax return, particularly income from serving in a combat zone.
U.S. Armed Forces members receive many different types of pay and allowances. Some are included in gross income while others are excluded from gross income. A detailed listing can be found in IRS Publication 3. Items included are basic pay, special pay, bonus pay, and incentive pay. Excluded items are combat pay, death allowances, family allowances, living allowances, moving allowances, travel allowances, and in-kind military benefits.
Members of the U.S. Armed Forces who serve in a combat zone may exclude certain pay from their income. The entitlement to the pay must have fully accrued in a month during which they served in the combat zone or were hospitalized due to wounds, disease, or injury incurred while serving in the combat zone. They do not have to receive the pay while in a combat zone, in a hospital, or in the same year they served in a combat zone. Service in a combat zone includes periods that military members are absent from duty because of illness, wounds, or leave. If, as a result of serving in a combat zone, military members become prisoners of war or are missing in action, they are considered to be serving in the combat zone as long as they remain in that status for military pay purposes. Military service outside a combat zone is considered to be performed in a combat zone if the service a) Is in direct support of military operations in the combat zone, and b) Qualifies a member for hostile fire/imminent danger pay due to dangers or risks from the combat zone. Pay received for this service will qualify for the combat zone exclusion if the other requirements are met. The following military service does not qualify as service in a combat zone:
Presence in a combat zone while on leave from a duty station located outside the combat zone
Passage over or through a combat zone during a trip between two points that are outside a combat zone, and
Presence in a combat zone solely for a member’s personal convenience
In a future post, we will drill down into the various income types for military personnel.