Some military pay is not taxable

By David Katzman

If you or a loved one is on active duty in the military, you may be entitled to some special tax benefits. For instance, members of the U.S. Armed Forces who are serving in a combat zone have two benefits—no federal income tax on combat-related pay and an automatic extension when filing your tax returns with the Internal Revenue Service (IRS).

Other combat-zone personnel also qualify for some benefits.

Excluding combat-zone pay

For non-officers, you can exclude the following types of pay while in a combat zone:

• Active duty pay and imminent danger or hostile-fire pay for all eligible months.

• Any bonus paid for reenlisting- This money is eligible even if you receive it later.

• Pay for accrued leave, as determined by the Department of Defense.

• Pay for service in clubs or other non-appropriated fund activities.

• Awards or other monetary compensation received for achievements, such as inventions.

• Pay for a combat-related hospitalization.

Most officers serving in a combat zone are eligible to exclude pay from any of the listed sources, as well, but the amount is limited to $6,529.20 per month in 2006. This figure is based on the highest enlisted pay rate, plus imminent danger or hostile-fire pay.

If you worked outside a combat zone but received imminent danger or hostile-fire pay because your work directly supported combat operations, you are also eligible for this tax break.

If your Form W-2 was completed correctly, you do not need to do anything further. Qualifying combat-zone pay will not be reported as wages. If your wages do reflect combat pay, you’ll need a replacement Form W-2. Your combat pay remains subject to Social Security and Medicare taxes.

Taking advantage of the filing extension benefit

A filing extension is available to a wide range of qualifying taxpayers. It applies to active duty military personnel, as well as others working in a combat zone, such as Red Cross workers and some civilian personnel. Some taxpayers working outside a combat zone, but in support of the combat effort, or in a contingency operation also qualify. Filing extensions generally apply to your spouse or children, as well.

For qualifying taxpayers, your deadline for any tax filing is automatically extended when you begin serving in a combat zone, even if that area was designated as such after you arrived.

Essentially, all federal tax filings are suspended until 180 days after your combat or contingency operation service ends, plus any time you originally had left to file. For example, if you should have filed your federal taxes on April 15, but you were deployed to a combat zone on March 15, your extension would be 210 days. Missing-in-action status or hospitalization resulting from combat injuries count as combat time, so the 180 days would not start until that status is resolved or, in the case of hospitalization, for up to five years of continuous hospitalization once back in the United States.

There are two ways to notify the IRS of your combat-zone status. You can write “Combat Zone” and the date you deployed, in red, at the top of your IRS form. You can also contact the agency through a special e-mail address, combatzone@irs.gov or you can call the IRS directly.

While you can take advantage of the filing extension, you are not required to wait. You can file anytime before the deadline. A tax professional can help you determine the best approach for your personal circumstances.

David A. Katzman is a certified public accountant licensed to practice in the State of Florida and the Commonwealth of Massachusetts. He is also a certified financial planner and certified senior advisor. Please consult your tax advisor for details and assistance in applying this general information to your specific situation.