Service in a combat zone is tough, arduous duty. Being far from family, friends and comfortable, familiar surroundings is hard. Whether you serve in the Army, Navy Air Force, Marines, Coast Guard, active duty, reserve or National Guard you are entitled to a valuable tax break for your overseas deployment service to our country. Its called the Combat Zone Exclusion and its important for you to be informed about it.
Much of your pay, especially while deployed is tax free. For enlisted personnel and warrant officers, your base pay is tax free when you step foot into a tax free zone. It applies to the entire month. So if you step foot into the zone on the last day of the month, the entire month's base pay is tax free! There is a misconception by many service members that the tax free pay was changed to a day-for-day rate, meaning you only got tax free pay for the days you were actually "downrange" but, it is just that - a rumor. The only catch is that for higher ranking officers your pay is only tax free up to the pay rate of an E-9. Any pay above that rate is not tax free. Your Leave and Earnings Statement (LES) and your W2's will reflect the correct taxable income amount for Federal Taxes: lower than what you actually got paid. That is, if your administration or disbursing offices are doing their job correctly. It's very easy to claim this income exclusion. Since your non-taxable pay is not included on your W2's you do not have to check a box or fill out an additional form for your return. Just report the wages shown on your W2's on your tax form, usually the 1040.
Some other pay that is similarly non-taxable pay includes imminent danger and hostile fire pay, re-enlistment bonuses for agreements signed in theater and leave accrued in theater. Of course, your Basic Allowance for Subsistence (BAS) and Basic Allowance for Housing (BAH) are not taxable whether you are in a combat zone or not.
So where are the current, tax free, combat zones? Afghanistan has been considered a combat zone since September 19th 2001. Yugoslavia and Albania were designated combat zones on March 24th, 1999. The Persian Gulf area (also called the Arabian Gulf) has been a combat zone since January 17th 1991. The Persian Gulf area includes The Persian Gulf, The Red Sea, The Gulf of Oman, The Gulf of Aden, Iraq, Kuwait, Saudi Arabia, Oman, Bahrain, Qatar and the UAE. The combat zone also extends into the airspace above all these areas.
We have all heard the stories of the General who commandeered a plane just to fly over hostile territory to get his tax free month but it is not "supposed" to happen. Contrary to popular belief, you cannot get the combat zone exclusion if you are just using the space to travel from one point outside the zone to another point outside the zone, if you are in the combat zone while on leave from a place outside the zone or if you are just there for your personal convenience.
Serving in a combat zone can be a rewarding experience. There are lots of opportunities for personal and professional growth. Friendships you forge there will last a life time. It can also be financially rewarding. To learn more, consult IRS Publication 3, Armed Forces' Tax Guide.
David Guild, MBA
Owner, Patriot Accounting LLC
http://www.patriotaccountingllc.com/
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