When you serve in a designated combat zone, some or all of your military pay becomes free of federal income tax. This is called the combat zone tax exclusion, and for many members it is worth hundreds of dollars a month.
The basic rule
- Enlisted members and warrant officers: all military pay earned in a month spent in a combat zone is excluded from federal income tax. That includes basic pay, reenlistment bonuses signed there and most special pays.
- Commissioned officers: pay is excluded up to a monthly cap. The cap is the highest rate of enlisted pay plus imminent danger pay. That covers all of the basic pay of most junior and mid-grade officers.
The exclusion comes from federal law, and the areas that qualify are set by executive order. Areas supporting combat operations can also qualify.
One day counts as a whole month
If you serve in a combat zone for even one day in a month, your pay for that entire month is excluded. Arriving on March 31 makes all of March tax-free, and leaving on August 1 makes all of August tax-free. This can add a month or two of tax-free pay to a deployment.
What it is worth
Take an E-5 with over 6 years of service, single, earning $4,110.00 a month in basic pay. At home, the estimated federal income tax on that pay is about $312 a month. In a combat zone it is zero. Over a six-month deployment that saves about $1,870.
An O-3 with over 6 years, single, earns $7,737.00 a month. Their estimated federal income tax of about $966 a month disappears, which saves nearly $5,800 over six months.
Members filing jointly pay less tax to begin with, so they save less. But the saving is still significant.
What still gets taxed
- Social Security and Medicare. FICA is still taken from basic pay, at 7.65%. The exclusion covers income tax only.
- State tax. Many states follow the federal rule, but not all of them. Check your state of legal residence.
- Pay above the officer cap. Officers whose pay exceeds the cap pay tax on the rest.
Extra deployment money
- Imminent danger or hostile fire pay is $225 a month.
- Family Separation Allowance is $250 a month for members with dependents who are away more than 30 days.
- The Savings Deposit Program lets members deployed in a combat zone deposit up to $10,000 and earn 10% annual interest. On the full amount that is about $1,000 a year.
- TSP. Contributions from tax-free combat pay count toward a much higher yearly limit than normal contributions. Roth contributions from tax-free pay are never taxed, either going in or coming out.
On your W-2
Excluded pay does not appear in box 1 of your W-2 as taxable wages. It is shown in box 12 with code Q. You may still choose to count it as earned income for the Earned Income Tax Credit, which can help lower-income families.
Common questions
Do I need to apply for the exclusion? No. Finance applies it automatically based on your location records. Check your LES each month to make sure federal tax withholding stops.
Does it apply to drill pay or Reserve duty? It applies to any military pay earned while serving in the combat zone on active duty orders, including for Guard and Reserve members.
What about a hospital stay after being wounded? Pay received while hospitalized for wounds, injury or illness from combat zone service stays tax-free, for up to two years after combat ends.
Compare your normal take-home pay in the total pay calculator, then see what changes on deployment.