Last month was a month of celebration. Whether they were celebrating the first full month of Spring or observing a major religious holiday Americans took the time to remember their good fortune.
In other parts of the world, there were other celebrations; celebrations of deliverance from a special kind of bondage we Americans have never known. You know what I am talking about; the fall of Saddam Hussein. Regardless of the ongoing debate over the propriety of Coalition actions, the fact is that hundreds of thousands of United States military personnel fought for the freedom of the Iraqi people and won. We thought it fitting to take a few minutes this month to remind those in the military, especially those in combat zones, of some special provisions in the tax code relating to their service.
Members of the United States Military enjoy certain tax benefits regardless of their location. Following are the major items included and excluded from taxable income.
for active duty personnel and reserve training is includible in income, unless earned while in a combat zone. Basic pay for attendance at a designated service school, back wages, drills and training duty are also counted in taxable income.
such as aviation career incentives, diving duty, foreign duty and other special pay are also included in taxable income if not earned in a combat zone. The same is true of enlistment and reenlistment bonuses, accrued leave, personal money allowances paid to high-ranking officers and student loan repayments by programs such as the Department of Defense Educational Loan Repayment Program.
Basic and special pay
for active service while in a combat zone or qualified hazardous duty area is fully excludible, subject to certain limitations for officers.
such as BAH (Basic Housing Allowance), BAS (Basic Allowance for Subsistence), OHA (Overseas Housing Allowance) and Housing and cost-of-living allowances while abroad are excludible from income.
There are various other allowances and special payments or benefits available to military personnel that are excludible from taxable income and we won’t go into them here. The bad news is that it can be confusing to keep track of what is and is not includible in taxable income for military personnel. The good news is the W-2 a member of the Armed Forces receives will generally properly report those items as taxable or non-taxable.
Combat Zones and Qualified Hazardous Duty Areas
Members of U.S. Armed Forces can exclude certain pay when accrued while they are in a designated combat zone/qualified hazardous duty area. (Note: where we talk about combat zones in the following discussion, this qualified hazardous duty areas also) Even if that service is only one day during the month, the full month’s pay will qualify for exclusion from taxable income. Such pay includes active duty pay, reenlistment bonuses, pay for accrued leave earned while in the combat zone and other payments earned while in the combat zone.
Enlisted personnel, warrant officers and commissioned warrant officers enjoy a 100% exclusion of applicable compensation earned during service in combat zones. Officers, on the other hand, can exclude only an amount equal to the maximum amount an enlisted member can exclude from taxable income.
For purposes of this exclusion, service in a combat zone includes not only actual service, but also time spent in a hospital (either in or outside of the zone) as a result of illness, wounds or injury incurred while serving in the combat zone. For example, assume Private Finn served in Iraq in March and was wounded by the enemy. He spent two days in a field hospital and was transported back to the States. He continued to be hospitalized for his injuries into April. Even though he was outside of the combat zone for all of April, he was hospitalized for wounds received while serving in a combat zone and, therefore, the April pay is excludible from income.
The President of the United States by Executive Order designates combat zones. These presently include the Afghanistan area (beginning September 19, 2001), the Kosovo area (beginning March 24, 1999) and the Persian Gulf Area (beginning January 17, 1991). Additionally, service in qualified hazardous duty areas in the former Yugoslavia qualifies as service in a combat zone (beginning November 21, 1995)
Service outside of a combat zone can qualify as if it is in the combat zone under certain circumstances, but incidental presence due to travel through the zone between two points outside of the zone and presence in a combat zone for personal convenience will not qualify for the exclusion.
If a member of the U.S. Armed Forces dies while serving in a combat zone or as a result of wounds, disease or other injury received while on active duty in a combat zone, then their tax liability is forgiven for the tax year in which the death occurred and for any earlier tax year ending on or after the first day the member served in a combat zone. Any liability forgiven that has already been paid is refundable.
This same general rule applies to any military or civilian employee of the U.S. Government who dies from wounds or injury incurred in a military action or terrorist action.
The idea for this article came on April 15, 2003 while extending a service member’s 2002 income tax return. If a service member is on active duty in a combat zone or qualified hazardous duty area, their deadline to take action with the IRS is extended until 180 days after the later of:
- The last day they are in a combat zone/qualified hazardous duty area or have qualifying service outside of the combat zone/qualified hazardous duty area, or
- The last day of any continuous qualified hospitalization resulting from service in the qualified hazardous duty area/combat zone or any qualifying service outside of the hazardous duty/combat zone.
There are numerous provisions related to filing deadlines and extensions thereof for military personnel in harms way. We won’t go into them here, but suffice it to say that there is no reason for any member of the U.S. Armed Forces or their family to worry about meeting filing deadlines while that member is serving in a combat zone/qualified hazardous duty area.
One very important item for reservists to remember is that they can obtain a deferral of back taxes owed under certain circumstances. To qualify, they must be serving in their initial period of service and they must show that their ability to pay the back taxes has been materially impaired because they are called up of active duty.
A former Army Sergeant was asked why he didn’t reenlist. He replied, “While I was serving in Grenada and the bullets were flying around, I suddenly realized a guy could get killed doing this!”
Because of the very real chance of death while serving their country and the hardships their families endure, military personnel are afforded certain benefits. This is Congress’ way of recognizing the pressures and special hazards facing our Armed Services members. Congress is presently debating expanding certain of these benefits, but we won’t discuss them until they become reality.
If you are a member of the U.S. Armed Forces, or are a spouse of one, don’t lose your benefits. While the military will generally report taxable and non-taxable income properly on form W-2, there are those times when errors occur or the issue is not specifically related to the W-2. In those instances where you have questions, give us a call. We’re here to help.
By the way, to the U.S., British and other Coalition Countries Armed Forces, thanks for the job you do.
Have a great and peaceful May.