How Much Is Combat Pay and Is It Taxable?

Combat pay is a unique form of compensation for military personnel serving in designated hazardous regions. This specialized remuneration is provided in addition to a service member’s basic pay and other standard allowances. Its purpose is to acknowledge the challenging circumstances and potential dangers faced by those deployed to areas of conflict or instability. This distinct category of earnings underscores the financial recognition given to military members for their service in environments where their safety may be compromised.

Qualifying Service and Locations

Eligibility for combat pay hinges on specific criteria related to both the service member’s activity and their geographic location. The Internal Revenue Service (IRS) defines a “combat zone” as an area designated by the President via Executive Order, where U.S. Armed Forces are engaged in combat operations. These designations include active combat areas, direct combat support areas, and qualified hazardous duty areas.

Current IRS-recognized combat zones include the Afghanistan area, the Kosovo area, and the Arabian Peninsula area. The Arabian Peninsula designation, for example, encompasses the Persian Gulf, Red Sea, Gulf of Oman, and specific land areas like Iraq, Kuwait, Saudi Arabia, Oman, Bahrain, Qatar, and the United Arab Emirates. Service members deployed to these areas, or those in direct support of military operations within them, may qualify for combat zone benefits.

To qualify for combat pay, a service member must perform active service in a designated combat zone or qualified hazardous duty area. This includes being present in the zone for at least one day of a month, even if on temporary duty or leave from within the zone. Service members hospitalized due to injuries incurred in a combat zone may also qualify for the exclusion for a period, generally up to two years after leaving the combat zone.

Combat Zone Tax Exclusion

The Combat Zone Tax Exclusion (CZTE) exempts certain military earnings from federal income tax. This exclusion applies to pay received by active-duty service members deployed to a designated combat zone or hospitalized due to injuries sustained there. This benefit is automatically applied and reflected on a service member’s pay statement and W-2 form.

For enlisted personnel, warrant officers, and commissioned warrant officers, all military basic pay earned for each month, or any part of a month, spent in a combat zone is excluded from federal income tax. This includes 100% of their basic pay, along with other tax-free incomes earned in the combat zone:
Incentive bonuses
Hostile fire/imminent danger pay
Accrued leave sold
A portion of student loan repayments

For commissioned officers, the CZTE is limited. Their excluded amount is capped at the highest rate of enlisted pay, plus any hostile fire or imminent danger pay they receive for that month. While federal income tax is excluded, Social Security and Medicare taxes (FICA taxes) still apply to combat pay and are withheld from earnings.

Other Special and Incentive Pays

Service members may receive various other special and incentive pays that contribute to their total compensation, especially when serving in hazardous or challenging environments. These pays address specific conditions, duties, or skills, and their taxability can vary.

Hazardous Duty Incentive Pay (HDIP) is provided for performing duties deemed inherently dangerous, such as parachute jumping, flight operations, or handling toxic chemicals. HDIP rates range from $150 to $225 per month. HDIP is taxable unless earned in a designated combat zone.

Imminent Danger Pay (IDP) and Hostile Fire Pay (HFP) are paid at a rate of $225 per month when military personnel serve in an officially declared imminent danger area or are subjected to hostile fire. These pays are taxable unless the service is performed within a designated combat zone or support area.

Family Separation Allowance (FSA) is a non-taxable allowance of $250 per month provided to service members who are involuntarily separated from their dependents for more than 30 consecutive days, often due to deployment. Hardship Duty Pay (HDP) is another form of special pay for service in locations with substantially lower living standards or extreme conditions. HDP-Location rates can be $50, $100, or $150 per month. HDP is taxable unless received in a designated combat zone.

Reporting Combat Pay for Tax Purposes

Reporting combat pay for tax purposes requires understanding how it is reflected on a service member’s Wage and Tax Statement, Form W-2. Non-taxable combat pay, specifically the portion excluded under the Combat Zone Tax Exclusion, is reported in Box 12 of the W-2 with code Q. This code indicates the income exempt from federal income tax.

Taxable portions of a service member’s pay, including any combat-related pay that is not excluded, are included in Box 1 of the W-2, which represents their total taxable wages. Service members should verify the accuracy of their W-2. If there are discrepancies, contact the military pay office to request a corrected W-2.

When preparing a tax return, the non-taxable combat pay reported with code Q in Box 12 is excluded from the calculation of federal adjusted gross income. This non-taxable income can still be considered when determining eligibility for certain tax credits, such as the Earned Income Tax Credit.