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Combat Pay Guide – Meaning – Tax Benefits – Where it Applies

What Is Combat Pay?

Combat PayCombat pay or imminent danger pay is a bonus to military personnel in addition to their regular military salary when they are deployed to a combat zone.

It is a tax-exempt monthly stipend.  The bonus is paid to active members of the U.S. armed services when they are serving in designated hazardous zones and is paid in addition to the person’s base salary. The hazard bonus is not open only to combat soldiers. Any person enrolled in a branch of the U.S. military who is assigned to a designated hazardous area is eligible to receive additional combat pay. Spending as little as one hour on duty in a hazardous zone can qualify for an entire month’s bonus.

 The extra bonus may be categorized as hostile fire and imminent danger pay and can be prorated for partial months. You can not receive both hostile fire and imminent danger pay at the same time.

Combat Pay Meaning

According to Military.com, members of the Armed Services qualify for combat pay if they are subject to or wounded by hostile fire or explosive mines, or on duty on foreign soil and subject to the threat of physical harm or imminent danger due to civil unrest, civil war, terrorism, or wartime conditions.

  • Combat pay is a bonus paid to military service personnel who are serving in regions that are designated hazard zones.
  • The additional pay is generally not subject to federal income tax although Social Security and Medicare taxes are deducted.
  • However, the additional pay is factored into applications for student aid made through the FAFSA.

Rules for Combat Pay and Hazardous Duty Pay

A federal tax exclusion is unlimited for enlisted members and is limited to the maximum enlisted pay amount for officers and warrant officers. If you spend a single qualifying day in the hazard zone, your pay for the entire month is excluded from taxable income.  Also, you receive $225 as a hazard bonus for that month. Any other bonuses you receive will be excluded from federal tax withholding if you earn them while in a hazard zone. For example, a reenlistment bonus is excluded from taxes if the member reenlists in the same month in which the member also served in a combat zone.

Since there is no limitation on amounts excluded for enlisted members, the entire reenlistment bonus would be excluded. As another example, an officer’s flight pay would also be excluded from taxable income.  However, only up to the point in which basic pay and flight pay do not exceed the maximum enlisted pay amount. (Source: thebalanbecareers.com)

Combat Pay Tax Benefits

Combat pay is generally not counted as federal taxable income. However, the recipient must still pay Social Security and Medicare taxes on the extra pay. States set their own rules for taxing hazard pay. The Department of Defense (DoD) can also designate certain combat zones excluded from the tax break. This extra pay is factored into applications for student aid made through the Free Application for Federal Financial Aid (FAFSA) form.  As a result, students or parents of college students could be affected.

Combat pay is income earned while stationed in a designated combat zone in service to the U.S. military. Combat pay is nontaxable for most service members, and all service members can exclude at least some of their combat pay from their taxable income. Nontaxable combat pay can be included on the tax return to calculate eligibility for the Earned Income Credit. Not all military income is considered combat pay, so service members should always evaluate their income when filing a tax return. Remember that service members stationed overseas for an extended period that overlaps with Tax Day (usually April 15) are automatically allowed an extra two months both to file and to pay any taxes owed. (Source: 1040.com)

Other Benefits

Military personnel with dependents also receive a monthly Family Separation Allowance (FSA).  This is effective any time they are away from their families for 30 or more days. In addition, personnel serving in combat zones can deposit up to $10,000 a year into a special savings account.  These accounts are guaranteed to pay 10% interest annually. This program was established during the Vietnam War.  Also, service members stationed overseas for an extended period that overlaps with Tax Day (usually April 15).  They are automatically allowed an extra two months both to file and to pay any taxes owed.

How to Calculate Combat Pay 

You do not have to report your nontaxable pay as a member of the Armed Forces. Examples of nontaxable military pay are combat pay.  Also, the Basic Allowance for Housing (BAH), and the Basic Allowance for Subsistence (BAS). Your nontaxable combat pay is listed on Form W-2, box 12, with code Q.

But you and your spouse can each choose to count your nontaxable combat pay as earned income to qualify for the Earned Income Tax Credit. Doing so still doesn’t make combat pay taxable though. Including it as earned income may decrease the amount of tax you owe and may mean a larger refund. It’s easy to try both ways — with combat pay included in earned income and without.  This is helpful to find out which works best for you.

If you make the election, you must include in earned income all nontaxable combat pay you received. You can’t choose to include only part of it. But, each spouse gets to choose separately.  Here are the option combinations:

  • You can choose to include all your nontaxable hazard bonuses and your spouse can choose none.
  • You can choose to include none of your nontaxable hazard bonuses and your spouse can choose to include it.
  • Both can choose to include all your nontaxable combat pay.
  • Both can choose not to include your nontaxable combat pay

(Source: ibid)

Countries in Designated Combat Zones

  • Afghanistan
  • Albania
  • Bahrain
  • Djibouti
  • Iraq
  • Jordan
  • Kosovo
  • Kuwait
  • Kyrgyzstan
  • Lebanon
  • Oman
  • Pakistan
  • Qatar
  • Saudi Arabia
  • Serbia/Montenegro
  • Somalia
  • Syria
  • Tajikistan
  • United Arab Emirates
  • Uzbekistan
  • Yemen

Bodies of Water Considered Military Combat Zones

  • The Persian Gulf
  • The Red Sea
  • The Gulf of Oman
  • The part of the Arabian Sea that is north of 10 degrees north latitude and west of 68 degrees east longitude
  • The Gulf of Aden
  • The Adriatic Sea
  • The Ionian Sea north of the 39th parallel

(Source: thebalancecareers.com)

Up Next: What Is the Spillover Effect?

Spillover EffectThe spillover effect in economics refers to the effect on a country’s economy from unrelated events happening in another country.

The effect refers to the impact that seemingly unrelated events in one nation can have on the economies of other nations. There are positive spillover effects.  However, the term is most commonly applied to the negative impact a domestic event has on other parts of the world.  These events include such events as an earthquake, stock market crisis, or another macroeconomic event.  Most of the world experiences significant spillover effects when there is a downturn in either of the world’s two largest economies.  Namely, the United States and China.

A spillover effect can have economic, social, or political consequences.  The impact can be felt in one region or across the world.  It is due to an independent event occurring from a seemingly unrelated event. More often, the event occurs in a specific country that leads to an impact spreading to the rest of the world. In return, it creates a social crisis or a shock in the economy like a boom or financial crash.

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