What Is the 112-42 Combat Zone Tax Exclusion?

Internal Revenue Code (IRC) Section 112 provides a tax benefit for military members serving in designated combat areas, allowing them to exclude certain military pay from their taxable income. The purpose of the Combat Zone Tax Exclusion is to offer financial relief to U.S. Armed Forces personnel serving in harm’s way. The exclusion applies only to income earned while performing duties in locations officially designated as combat zones by the President of the United States. It is a defined provision that has direct implications for how a service member’s annual income is taxed at the federal level.

Qualification Requirements for the Exclusion

To qualify for the combat zone income exclusion, an individual must be a member of the U.S. Armed Forces performing active service. This encompasses members of the Army, Navy, Air Force, Marine Corps, and Coast Guard. The primary requirement is service in a combat zone, an area designated by a Presidential Executive Order where the Armed Forces are engaged in combat. The IRS maintains the official record of these locations, which currently includes:

• The Afghanistan Area
• The Arabian Peninsula Area
• The Kosovo Area
• The Sinai Peninsula

The exclusion also extends to personnel serving in direct support of military operations in a combat zone, which qualifies them for hostile fire or imminent danger pay. This means a service member stationed in a nearby country but flying missions into the combat zone could be eligible.

For the exclusion to apply to a month’s pay, a service member only needs to be in a qualifying area for at least one day of that month. If a member serves any part of a day in a combat zone, their eligible pay for the entire month is excludable from gross income. For example, a service member who enters a combat zone on the last day of the month is entitled to the exclusion for that entire month’s military compensation.

Scope of the Income Exclusion

For qualifying service members, excludable income includes basic pay earned during the month of service in a combat zone. It also covers several other forms of compensation:

• Reenlistment bonuses, if the reenlistment occurs in the combat zone
• Hostile Fire or Imminent Danger Pay
• Pay for accrued leave earned in the combat zone
• The portion of student loan repayments attributable to service in the zone

Pay received for accrued leave that was earned during service in a combat zone is also excludable. However, income from non-military sources, such as a personal business, rental properties, or investment dividends, is not excludable under this provision.

A distinction exists in how the exclusion is applied to enlisted personnel versus commissioned officers. For enlisted members and warrant officers, the entire amount of their military pay for a qualifying month is excluded from gross income. This provides a complete tax shield for their military compensation earned during combat service.

For commissioned officers, the exclusion is subject to a monthly cap. The amount of pay an officer can exclude is limited to the highest rate of enlisted pay for that month, plus any Hostile Fire or Imminent Danger Pay they receive. In 2025, this cap is $10,294.80 per month plus up to $225 in Hostile Fire or Imminent Danger Pay; any military pay an officer earns above this combined amount remains subject to income tax.

Tax Filing and Reporting

Reporting combat zone pay is handled through the Form W-2 provided by the military. The Department of Defense automatically certifies a service member’s entitlement and reflects this on the W-2. Excluded combat pay is reported in Box 12 with “Code Q” and is not included in the taxable wages in Box 1. Because the income is already excluded from taxable wages, it does not get carried over to the Form 1040. If a service member believes their W-2 is incorrect, they should contact their military pay office to have a corrected W-2 issued.

Although combat pay is not taxable, service members can elect to include it in their “earned income” calculation for specific tax credits. This voluntary choice applies only to the Earned Income Tax Credit (EITC) and the Additional Child Tax Credit (ACTC). Including this pay can increase the amount of earned income, potentially resulting in a larger refund from these credits. Taxpayers should calculate their refund both with and without the combat pay to determine which option is more beneficial.

Extension of Tax Deadlines

Service members in a combat zone receive an automatic extension for filing tax returns and paying any taxes owed. This extension does not need to be requested and covers other tax-related actions, such as making IRA contributions or responding to IRS notices. The extension grants the service member at least 180 days after their last day in the combat zone.

In addition to this 180-day period, the extension includes the number of days that were left in the tax filing season when the service member first entered the zone. For instance, if a service member entered a combat zone on March 15, they had 31 days remaining until the April 15 tax deadline. Their new deadline would be calculated by adding 180 days plus those 31 days, pushing the deadline well into the following year. This combined period ensures that service members have ample time to handle their financial affairs upon returning home.

This extension also applies to the service member’s spouse for filing a joint return, but not for separate returns. During the extension period, no penalties or interest will be charged on any tax liability.

Special Circumstances and Provisions

Provisions exist for unique circumstances. If a service member is hospitalized due to wounds, disease, or injury incurred while serving in a combat zone, the income exclusion continues to apply to their military pay. This benefit can last for up to two years after the date they officially leave the combat zone. The rules also extend to service members who are officially designated as Missing in Action (MIA), for whom the combat zone tax benefits remain in effect for the entire period they are in that status.

The tax code also provides for the forgiveness of income tax liability if a service member dies while serving in a combat zone or from wounds sustained there. Their income tax liability is forgiven for the entire year of their death, applying to all federal income tax owed for that year. This forgiveness also extends to any prior tax years that ended on or after the first day the service member began service in that combat zone. This provision offers significant financial relief to the surviving family members during an exceptionally difficult time.