TAX INFORMATION FOR MEMBERS OF THE ARMED FORCES

The tax laws provide some special benefits for active members of the U.S. Armed Forces, including those serving in combat zones.

For federal tax purposes, the U.S. Armed Forces includes officers and enlisted personnel in all regular and reserve units controlled by the Secretaries of Defense, the Army, Navy and Air Force. The Coast Guard is also included, but not the U.S. Merchant Marine or the American Red Cross. However, these and other support personnel may qualify for certain tax deadline extensions because of their service in a combat zone.

These items offer guidance on the tax relief provided for U.S. military and support personnel involved in military operations in a combat zone.

Combat Pay
If you serve in a combat zone as an enlisted person or as a warrant officer (including commissioned warrant officers) for any part of a month, all your military pay received for military service that month is excluded from gross income.  For commissioned officers, the monthly exclusion is capped at the highest enlisted pay, plus any hostile fire or imminent danger pay received.

Military pay received by enlisted personnel who are hospitalized as a result of injuries sustained while serving in a combat zone is excluded from gross income for the period of hospitalization, subject to the 2-year limitation provided below. Commissioned officers have a similar exclusion, limited to the maximum enlisted pay amount per month. These exclusions from gross income for hospitalized enlisted personnel and commissioned officers end 2 years after the date of termination of the combat zone.

Taxpayers covered by the relief provisions described here should put the words "COMBAT ZONE" and their deployment date in red at the top of their tax returns.

Covered taxpayers who receive a notice from the IRS regarding a collection or examination matter should return the notice to the IRS with the words "COMBAT ZONE" and the deployment date in red at the top of the notice and put "COMBAT ZONE" on the envelope so the IRS can suspend the action. Taxpayers may prevent issuance of such notices by notifying the IRS that they are serving in a combat zone.

Some military personnel receiving combat pay get larger tax credits. The law counts excludable combat pay as income when figuring the Child Tax Credit and gives the taxpayer the option of counting or ignoring combat pay as income when figuring the Earned Income Tax Credit. Counting combat pay as income when calculating these credits does not change the exclusion of combat pay from taxable income.

Death Benefits
The death gratuity paid to survivors of deceased Armed Forces members rises to $12,000 and is not taxable.

Sale of Principal Residence
A taxpayer on qualified official extended duty in the U.S. Armed Services or the Foreign Service may suspend for up to 10 years of such duty time the running of the 5-year ownership-and-use period before the sale of a residence. This applies when the duty station is at least 50 miles from the residence - or while the person is residing under orders in government housing - for a period of more than 90 days or for an indefinite period. This election, which is an option for the taxpayer, applies to only one property at a time. Retroactive for home sales after May 6, 1997.

Overnight Travel Expenses Of National Guard And Reserve Members
Reservists who stay overnight more than 100 miles away from home while in service (e.g., for a drill or meeting) may deduct un-reimbursed travel expenses (transportation, meals and lodging) as an above-the-line deduction. The deduction is limited to the rates for such expenses authorized for federal employees, including per diem in lieu of subsistence.

Combat Zone Extensions Expanded To Contingency Operations
The various extensions granted to combat zone participants to file returns or pay taxes will also apply to those serving in Contingency Operations, as designated by the Secretary of Defense.

Dependent Care Assistance Programs
Dependent care assistance programs for military personnel are excludable benefits.

Military Academy Attendees
The ten percent tax on payments from a Qualified Tuition Program or Coverdell Education Savings Account that are not used for educational expenses does not apply to attendees of the U.S. Military, Naval, Air Force, Coast Guard or Merchant Marine Academies, to the extent the payments do not exceed the costs of advanced education.