Where to Report Combat Pay on Your Form 1040
This guide details the tax treatment of combat pay, from standard reporting procedures to a key choice that can influence your eligibility for valuable tax credits.
Military service members who serve in a combat zone receive compensation that has a unique status under federal tax law. This income, known as combat pay, is generally not taxable. A combat zone is an area designated by a presidential executive order where the U.S. Armed Forces are engaging in combat. The tax-exempt nature of this pay means it is not included in your gross income for federal tax purposes, which can lower your overall tax liability. This exclusion applies to active duty pay, imminent-danger or hostile-fire pay, and certain bonuses received for any month served in a designated zone.
Identifying Combat Pay on Your W-2
Before you can properly account for combat pay on your tax return, you must first identify the correct amount on your Form W-2, Wage and Tax Statement. Nontaxable combat pay is specifically reported for informational purposes in Box 12 of your W-2. You will see the code “Q” next to the dollar amount.
The figure in Box 12 with Code Q should not be included in the taxable wages shown in Box 1 of the same W-2. The finance office is responsible for ensuring that Box 1, which is used to calculate your total taxable income, already has the combat pay amount excluded. If you believe your taxable wages in Box 1 incorrectly include your nontaxable combat pay, you should contact your finance office to request a corrected Form W-2.
Electing to Include Combat Pay in Taxable Income
While combat pay is nontaxable and generally not reported on your tax return, you have the option to include it in your earned income for the purpose of calculating certain tax credits. This choice does not make the combat pay taxable but allows it to be counted when determining your eligibility for credits like the Earned Income Tax Credit (EITC) or the Additional Child Tax Credit (ACTC). For some taxpayers, making this election can lead to a larger tax refund.
To make this election, you report your nontaxable combat pay on the designated line on Schedule 1 (Form 1040). On recent tax forms, this line is specifically labeled “Nontaxable combat pay election.” This is a strategic choice that should be evaluated based on your individual financial situation.
State Tax Treatment of Combat Pay
The tax treatment of military pay, including compensation earned in a combat zone, is not uniform at the state level. Many states align with the federal government’s approach and do not tax this income. However, not all states follow this model, and some may have different rules or specific requirements for excluding military compensation. Because of this variability, you should verify the regulations in your state of legal residence by consulting the official website or publications from your state’s department of revenue or tax agency.