It's no secret that America is on the verge of a sustained military action. That action will probably mean more military personnel will see active duty and that many of them will be placed in harm's way.
Recognizing the tremendous burden placed on military personnel and their families, as well as on civilian employees of the Federal Government placed in combat zones, Congress has provided a number of tax exemptions not available to most taxpayers. The House of Representatives voted unanimously on September 13, 2001 to extend some little used military exemptions to the families of the victims of the September 11, 2001 terrorist attacks. These exemptions are not often used because the taxpayer must be deceased in order for their family to benefit. As of the writing of this article, the Senate had not yet voted on the bill.
So what exemptions does our tax code offer those of you who place yourselves in imminent danger on communal behalf? Let's take a look:
Military Exclusions from Gross Income
If you’re in the military, compensation paid for active service while you’re in a combat zone or qualified hazardous duty area is excluded from taxable income. If you’re an enlisted member of the armed services, the full amount of your income, while you’re in a combat zone, is excludable. If you’re an officer, you can exclude up to the amount excludable by the highest paid enlisted person.
BAH (Basic Allowance for Housing), BAS (Basic Allowance for Subsistence), Housing and Cost-of-living allowances, whether paid by the United States Government or a Foreign Government and OHA (Overseas Housing Allowance) are excludable from taxable income. Even better, if you own your home, you can deduct home mortgage payments for interest and taxes even if those payments are made with the BAH.
Death allowances for burial services, death payments up to $3,000 to your eligible survivors and travel of your dependents to the burial site are all excluded from gross income.
Various moving allowances, including storage, moving trailers or mobile homes and temporary lodging and temporary lodging expenses are excludable from gross income. Let’s look as some related, miscellaneous exemptions:
Exclusions For United States Government Civilian Employees Stationed Abroad
If you’re a civilian government employee stationed abroad you don't receive the same benefits as military employees. With the exception of moving expenses, cost of living allowances and other miscellaneous benefits, your compensation is generally taxable.
So, what exactly is the combat zone exclusion?
If you serve in a combat zone (see the definition below) you can exclude certain amounts from income for the period in which you’re in the combat zone. It doesn’t matter if you receive the income in the year you’re in the combat zone or are hospitalized due to your presence in the combat zone, you must simply have earned the income while in the combat zone.
Enlisted personnel, warrant officers and commissioned warrant officers can exclude all of the following amounts from their income:
- Active duty pay earned in any month you served in a combat zone.
- Imminent danger/hostile fire pay.
- A reenlistment bonus if the voluntary extension or reenlistment occurs in
a month you served in a combat zone.
- Pay for leave earned in any month you served in a combat zone.
- Awards for suggestions, inventions or scientific achievements you are entitled
to because of a submission you made in a month you served in the combat zone.
- Student loan repayments that are attributable to your period of service
in a combat zone.
If you served in the combat zone for one or more days during a month, but not the full month, you are counted as having earned all of that month’s income in the combat zone.
What constitutes a Combat Zone?
A combat zone is any area the President of the United States designates by Executive Order as a combat zone. There are presently two active combat zones and one hazardous duty zone:
- The Kosovo area, by Executive Order 13119 and Public Law 106-21, was declared
a combat zone and a qualified hazardous duty area beginning March 24, 1999.
- Certain portions of the Persian Gulf area, by Executive Order 12744, were
designated as combat zones beginning January 17, 1991.
- Bosnia and Herzegovina, Croatia and Macedonia are all qualified hazardous
For purposes of determining when income tax returns are due, if you’re away from your permanent duty station in support of operations in a qualified hazardous duty area, but you are not in that area, you’re counted as being in a combat zone. However, you are not treated as being in a combat zone for purposes of the combat zone exclusion. We know this sounds confusing. There are several nuances and requirements relating to combat zones that, taken together, can make specific situations quite complicated. We suggest you contact your tax preparer before filing your return, but two more items are worth mentioning.
First, as we said earlier, the exclusion available to officers is an amount equal to the highest amount paid to an enlisted person.
Second, if someone dies in a combat zone or as a result of wounds, disease or other illness received in a combat zone, the survivor(s) are not required to pay income taxes on the deceased’s income for the year in which he or she died and any earlier year ending on, or after, the first day in which the deceased served in a combat zone. For example, say John Tech Sergeant died on March 13, 2001 from injuries sustained in November 2000. His tax is forgiven for 2000 and 2001.
Terrorist or Military Action Forgiveness
The tax liability is forgiven for anyone who:
- Is a military or civilian United States employee at death, and
- Dies from wounds or injuries incurred while a U.S. employee in a terrorist
or military action outside the United States.
The forgiveness applies to the tax year of death and for any earlier tax year beginning with the year before the year in which the wounds or injuries occurred.
For, example, assume Joe Tech Sergeant dies on February 15, 2001 from wounds received on November 16, 2000. His tax liability is forgiven for 1999, 2000 and 2001.
In the case of both the combat zone forgiveness and terrorist or military action forgiveness, the tax forgiven is only the tax payable by the decedent. If there is a spouse and the spouse has income, the spouse will still pay taxes. In the case of joint returns in community property states, all of the income tax will be forgiven. Any tax paid prior to death, which is forgiven, is refundable.
The recent House legislation was enacted to apply the Terrorist or Military Action Forgiveness rules to the victims of the September 11, 2001 attack.
Travel and other “employee business expenses”
It’s difficult to conceive of the military and military operations a business, but when it comes to taxes, expenses incurred by military personnel on behalf of their employer are considered business expenses. Accordingly, these expenses are subject to the 2% floor for itemized deductions.
Reservists can deduct travel expenses if they are under competent orders, with or without pay, and away from their main place of business overnight to perform drills and training.
If you’re called up, as has recently happened, you can deduct travel expenses if you keep your regular job while on active duty, return to your job after release and are stationed away from the general area of your regular job or business. Again, there are several limitations to deductibility and we strongly urge you to contact competent help before filing your tax return.
There are numerous other benefits available to individuals that serve in the military, and especially those serving in combat zones. Benefits available to U.S. civilian employees are not quite so extensive. However, as with most tax laws, the rules can get quite complicated. If you’re in the military, give us a call and let us help you through the maze of the tax law. Your job will soon be getting more difficult; don’t let tax matters keep you awake at night also.
Until November, God bless America and all of its citizens, especially those fighting the terrorists directly.