Servicemembers serving in designated combat zones or qualified hazardous duty areas can exclude some or all of their military pay from federal income taxes while deployed. The rules differ for enlisted members versus officers, and the timing of the exclusion requires attention for members who transition in and out of a combat zone within a tax year.

What Is a Combat Zone?

Per IRS Publication 3 (Armed Forces' Tax Guide), a combat zone is an area the President designates by Executive Order as an area in which U.S. Armed Forces are engaging or have engaged in combat. These designations include:

  • The Arabian Peninsula Areas (designated 1991)
  • Kosovo and vicinity (designated 1999)
  • Afghanistan (designated 2001)
  • Sinai Peninsula (designated 2015)

The IRS maintains a current list of designated combat zones at irs.gov.

What Is Excluded?

For enlisted members (including warrant officers): All military pay received for any month during which you served in a combat zone for any part of that month is fully excluded from gross income.

For commissioned officers: The monthly exclusion is capped at the highest enlisted pay plus hostile fire or imminent danger pay for the month. This cap is the highest E-9 basic pay rate plus the hostile fire / imminent danger pay rate, and it adjusts with the annual pay tables.

Reenlistment bonuses received during a month when you serve in a combat zone are also excluded.

The One-Day Rule

A critical feature of the combat zone exclusion is that serving in the combat zone for even one day in a month qualifies the entire month's pay for exclusion. You do not need to serve the entire month in the combat zone to exclude the full month's pay.

Combat Zone Pay and TSP: The Roth Connection

As covered in the TSP Roth vs. Traditional article, combat zone excluded pay that is contributed to a Roth TSP is never taxed — the pay was excluded when earned, and Roth withdrawals are tax-free in retirement. This combination is a unique tax advantage available only to combat zone servicemembers.

How to Claim the Exclusion

You do not need to claim the exclusion on your tax return — your W-2 from DFAS will reflect the excluded pay in Box 12 (with Code Q). The excluded combat zone pay is simply not included in your Box 1 wages. The IRS recommends servicemembers retain their deployment orders and records of combat zone service dates in case of questions.

If your W-2 appears to include combat zone pay that should have been excluded, contact your finance office to request a corrected W-2 (W-2C) before filing.

KEY TAKEAWAYS:

  • Enlisted members in a designated combat zone exclude all military pay for any month they serve there, even one day
  • Officers' exclusion is capped at the monthly pay of the highest enlisted rate plus hostile fire pay
  • Reenlistment bonuses received during a combat zone month are also excluded
  • Combat zone pay contributed to Roth TSP is never taxed — excluded when earned, tax-free in retirement
  • Your DFAS W-2 should reflect the exclusion automatically; review Box 12, Code Q