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IRS.gov Website
Publication 3
taxmap/pubs/p3-003.htm#en_us_publink1000176201

Combat Pay Exclusion(p12)

rule
taxmap/pubs/p3-003.htm#en_us_publink100049749

How Much of My Combat Pay Can I Exclude?(p12)

rule
taxmap/pubs/p3-003.htm#en_us_publink100050168

Enlisted member, warrant officer, or commissioned warrant officer.(p12)

rule
If you are an enlisted member, warrant officer, or commissioned warrant officer, none of your combat pay is included in your income for tax purposes.
taxmap/pubs/p3-003.htm#en_us_publink100049750

Commissioned officers (other than commissioned warrant officers). (p12)

rule
If you are a commissioned officer (other than a commissioned warrant officer), there is a limit to the amount of combat pay you can exclude. The amount of your exclusion is limited to the highest rate of enlisted pay (plus imminent danger/hostile fire pay you received) for each month during any part of which you served in a combat zone or were hospitalized as a result of your service there. For 2016, the applicable amount is $8,222.10 per month (that is, $7,997.10 for the highest enlisted pay + $225 for imminent danger pay).
taxmap/pubs/p3-003.htm#en_us_publink100049752

Earned income election.(p13)

rule
Though your combat pay is excluded from income, you can elect to include it in income in figuring your earned income credit. See Can I treat my nontaxable combat pay as earned income under Earned Income Credit, later.
taxmap/pubs/p3-003.htm#en_us_publink100049751

How Do I Report This Exclusion?(p13)

rule
Ordinarily, you do not have to do anything for this exclusion to apply. The exclusion will be reflected on your Form W-2. The wages shown in box 1 of your 2016 Form W-2 should not include military pay excluded from your income under the combat pay exclusion provisions. If it does, you will need to get a corrected Form W-2 from your finance office. You cannot exclude as combat pay any wages shown in box 1 of Form W-2.
taxmap/pubs/p3-003.htm#en_us_publink100050215

What Is Combat Pay?(p13)

rule
Combat pay is pay received by a member of the U.S. Armed Forces who serves in:
  1. A combat zone as designated by the President in an executive order (see Combat Zone Defined, later);
  2. A qualified hazardous duty area designated by Congress while receiving hostile fire pay or imminent danger pay in accordance with 37 U.S.C. 310 and 37 U.S.C. 351 (see Serving in a Combat Zone, later); or
  3. An area outside the combat zone or qualified hazardous duty area when the Department of Defense (DOD) certifies that such service is in direct support of military operations in a combat zone or qualified hazardous duty area, and the member receives hostile fire pay or imminent danger pay (see Serving Outside Combat Zone Considered Serving in a Combat Zone, later).
The month for which you receive the pay must be a month in which you either: You do not have to receive the excluded pay while you are in a combat zone, are hospitalized, or in the same year you served in a combat zone.
taxmap/pubs/p3-003.htm#en_us_publink100049748
Partial month service is treated as full month of service.(p13)
If you serve in a combat zone for any part of one or more days during a particular month, you are entitled to a combat pay exclusion for that entire month.
taxmap/pubs/p3-003.htm#en_us_publink100049905

Are my retirement pay and pensions treated as combat pay?(p13)

rule
Retirement pay and pensions do not qualify for the combat pay exclusion.
taxmap/pubs/p3-003.htm#en_us_publink1000176207

Combat Zone Defined(p13)

rule
A combat zone is any area the President of the United States designates by Executive Order as an area in which the U.S. Armed Forces are engaging or have engaged in combat. An area usually becomes a combat zone and ceases to be a combat zone on the dates the President designates by Executive Order. To date, the Afghanistan area, the Kosovo area, and the Arabian Peninsula have been designated as combat zones. Each is discussed below.
taxmap/pubs/p3-003.htm#en_us_publink1000176208

The Afghanistan area.(p13)

rule
By Executive Order No. 13239, Afghanistan (and the airspace above) was designated as a combat zone beginning September 19, 2001.
The following countries were certified by the Department of Defense for combat zone tax benefits due to their direct support of military operations in the Afghanistan combat zone.
Note. For the Philippines only, the personnel must have deployed in conjunction with Operation Enduring Freedom or Operation Freedom Sentinel supporting military operations in the Afghanistan combat zone.
taxmap/pubs/p3-003.htm#en_us_publink1000176209

The Kosovo area.(p13)

rule
By Executive Order No. 13119, the following locations (including airspace above) were designated as a combat zone beginning March 24, 1999. Note. The combat zone designation for Montenegro and Kosovo (previously a province within Serbia) under Executive Order 13119 remains in force even though Montenegro and Kosovo have become independent nations since EO 13119 was signed.
taxmap/pubs/p3-003.htm#en_us_publink1000176210

The Arabian Peninsula.(p13)

rule
By Executive Order No. 12744, the following locations (and airspace above) were designated as a combat zone beginning January 17, 1991.
The following countries were certified by the Department of Defense for combat zone tax benefits due to their direct support of military operations in the Arabian Peninsula combat zone.
taxmap/pubs/p3-003.htm#en_us_publink1000176211

Service Eligible for Combat Pay Exclusion(p14)

rule
As noted earlier, pay eligible for the combat pay exclusion must have been received for a month in which you either served in a combat zone or were hospitalized as a result of wounds, disease, or injury incurred while serving in the combat zone. We discuss these below. See also Serving Outside Combat Zone Considered Serving in a Combat Zone, later.
taxmap/pubs/p3-003.htm#en_us_publink100050347

Serving in a Combat Zone(p14)

rule
You are considered to be serving in a combat zone if you are either assigned on official temporary duty to a combat zone or you qualify for hostile fire/imminent danger pay while in a combat zone.
Service in a combat zone includes any periods you are absent from duty because of sickness, wounds, or leave. If, as a result of serving in a combat zone, a person becomes a prisoner of war or is missing in action, that person is considered to be serving in the combat zone so long as he or she keeps that status for military pay purposes.
taxmap/pubs/p3-003.htm#en_us_publink1000176212

Hospitalization As a Result of Wounds, Disease, or Injury Incurred While Serving in a Combat Zone(p14)

rule
taxmap/pubs/p3-003.htm#en_us_publink100050169

Hospitalized while serving in a combat zone.(p14)

rule
If you are hospitalized while serving in a combat zone, the wound, disease, or injury causing the hospitalization will be presumed to have been incurred while serving in the combat zone unless there is clear evidence to the contrary.
taxmap/pubs/p3-003.htm#en_us_publink1000176213

Example.(p14)

You are hospitalized for a specific disease in a combat zone where you have been serving for 3 weeks, and the disease for which you are hospitalized has an incubation period of 2 to 4 weeks. The disease is presumed to have been incurred while you were serving in the combat zone. On the other hand, if the incubation period of the disease is 1 year, the disease would not have been incurred while you were serving in the combat zone.
taxmap/pubs/p3-003.htm#en_us_publink100050170

Hospitalized after leaving a combat zone.(p14)

rule
In some cases, the wound, disease, or injury may have been incurred while you were serving in the combat zone, even though you were not hospitalized until after you left. In that case, you can exclude military pay earned while you are hospitalized as a result of the wound, disease, or injury.
taxmap/pubs/p3-003.htm#en_us_publink1000176215

Example.(p14)

You were hospitalized for a specific disease 3 weeks after you left the combat zone. The incubation period of the disease is from 2 to 4 weeks. The disease is presumed to have been incurred while serving in the combat zone.
taxmap/pubs/p3-003.htm#en_us_publink100050171

Time limit on combat pay exclusion for pay received while hospitalized.(p14)

rule
If you are hospitalized, you cannot exclude any military pay received for any month of service that begins more than 2 years after the end of combat activities in the combat zone. This pay will not be combat pay.
taxmap/pubs/p3-003.htm#en_us_publink100050172

Serving Outside Combat Zone Considered Serving in a Combat Zone(p14)

rule
Military service outside a combat zone is considered to be performed in a combat zone if:
Military pay received for this service will qualify for the combat pay exclusion if all of the requirements (other than service in a combat zone) are met and the pay is verifiable by reference to military pay records.
taxmap/pubs/p3-003.htm#en_us_publink100050611

Nonqualifying Presence in a Combat Zone(p14)

rule
None of the following types of military service qualify as service in a combat zone.