December 14 , 2008 - What tax relief is available for activated reservists and other military personnel for service in a combat zone and in contingency operations?

This is a time of hardship for many military families. Many Americans with family members in active duty in the armed forces have been separated from their loved ones for quite a while because of long deployments, and many reservists have been called up to active duty for prolonged service in distant and dangerous regions of the world. America is grateful for the sacrifice these soldiers and their families are making.
The tax laws provide some special benefits for members of the U.S. Armed Forces (including reservists called to active duty) who are serving in a combat zone or as part of a contingency operation. In recognition of their service to America, all servicemen and women are provided an exclusion from income for the military pay they earn while in a combat zone, and automatic extensions of time for filing a return or paying a tax. This tax relief, as detailed more fully below, applies to military and support personnel serving in combat zones such as the Arabian Peninsula area, the Afghanistan area, and the Kosovo area.

Military pay exclusion. In general, members of the U.S. Armed Forces who serve in a combat zone can exclude certain pay from income. Amounts excluded from income are not subject to federal income tax.

Non-officers. Enlisted personnel, warrant officers and commissioned warrant officers can exclude:
-Active duty pay earned in any month served in a combat zone.
-Imminent danger/hostile fire pay and military pay earned while hospitalized as a result of wounds, disease or injury incurred in the combat zone.
-A reenlistment bonus if the voluntary extension or reenlistment occurs in a month served in a combat zone, even if the bonus is paid after the recipient is out of the combat zone.
-Pay for accrued leave earned in any month served in a combat zone.
-Pay received for duties as a member of the Armed Forces in clubs, messes, post and station theaters and other non-appropriated fund activities earned in a month served in a combat zone.
-Awards received for suggestions, inventions or scientific achievements because of a submission made in a month in a combat zone.

Officers. The exclusions listed above also apply to commissioned officers, but are limited to the highest rate of enlisted pay (plus imminent danger/hostile fire pay received) for each month during any part of which officers served in a combat zone. For 2008, the most a commissioned officer can earn tax-free each month is $7,066.80, based on the highest monthly enlisted pay of $6,841.80 plus $225 hostile fire or imminent danger pay.

Outside combat zone. U.S. Armed Forces personnel serving outside the combat zone are entitled to the military pay exclusion only if they are serving in direct support of military operations in the combat zone for which they receive hostile fire/imminent danger pay.

Reporting & payroll tax. You do not need to claim the combat zone exclusion on your tax return because this type of income is excluded normally from an Armed Forces member's wages. The wages shown in box 1 of the Armed Forces member's Form W-2 should not include military pay excluded from income under the combat zone exclusion provisions. If it does, the Armed Forces member will need to get a corrected Form W-2 from his or her finance office. You cannot exclude as combat pay any wages shown in box 1 of Form W-2. It is also important to note that combat zone pay is subject to Social Security and medicare taxes and will be reported on Form W-2 in the boxes marked “Social security wages” and “Medicare wages and tips.”

Effect on refundable child credit. Individuals with adjusted gross income below certain levels may claim a child tax credit of $1,000 per qualifying child under 17. The credit is refundable to the extent of 15% of earned income above $12,050 in 2008. When determining earned income for purposes of the refundable child credit, excluded combat pay is treated as earned income.

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