What is Combat Pay?

Military members and their families make significant sacrifices, especially during deployment. As a result, they are eligible for certain financial benefits, including combat pay, which gives deployed service members an additional stipend and certain tax benefits.

This practice dates back to World War II when the military offered Badge Pay to service infantry members. But combat pay didn’t exist in its current form until 1952 for enlisted persons deployed to Korea.

In this article, you’ll learn more about what combat pay is, how it affects taxes, and what other benefits it provides.

What is combat pay?

Combat pay is all of the pay military personnel receive in a month in which they’re stationed in a combat zone. It includes wages, bonuses, and any other military income and is eligible for certain tax benefits.

The term combat pay is also often used to refer to the extra stipend that service members get during those months they are stationed in a combat zone. This stipend, officially known as either imminent danger pay or hostile fire pay, is an amount someone earns on top of their normal income.

Today service members can receive an additional $225 per month during any month they are stationed in an area where combat pay applies. Here’s a list of the currently recognized combat zones:

However, imminent danger and hostile fire pay are based on the number of days you’re deployed in a qualifying area. The additional pay is $7.50 per day that you are deployed to a hostile fire or imminent danger area, for a maximum amount of $225 if you serve there the entire month.

How does combat pay work with income taxes?

Military personnel don’t have to serve an entire month in a combat zone to be eligible for the tax benefits of combat pay. They’ll receive those tax benefits during any month where they served one or more days. During that time, they won’t have to include their combat pay in their adjusted gross income, meaning it won’t be subject to federal income taxes. Types of benefits included in combat pay are:

• Active duty pay
• Imminent danger or hostile fire pay
• Reenlistment bonuses
• Pay for unused accrued leave
• Awards and achievement pay
• Pay for additional duties
• Student loan repayment

If you’re an officer in the armed services, you may be limited as to what income counts as combat pay for the federal income tax exclusion benefit. Commissioned officers, for instance, can only exclude the maximum rate for enlisted pay in addition to any imminent danger or hostile fire pay they are eligible for. They cannot, however, include bonuses, accrued leave, awards, and other income in their tax exclusion benefit.

Depending on where you live, you may also be able to exclude your combat pay from your income for state tax purposes. While taxing combat pay depends on individual state decisions, many choose to do so.

Do you get more taxes back if you were deployed?

Because you don’t have to pay income taxes on your income during a time you were deployed to a combat zone, you might receive a larger refund or have a small tax bill during the year of your deployment.

Combat pay and the Earned Income Tax Credit (EITC)

Another unique benefit associated with combat pay is the way it’s treated for purposes of the Earned Income Tax Credit (EITC). Originally, combat pay was not included as earned income to calculate the EITC. However, it was found that the exclusion of combat pay was actually disadvantageous to certain service members. They received a lower EITC than they may have been eligible for if they had included their combat pay.

The Working Families Tax Relief Act passed in 2004 allowed enlisted persons the option of whether to include their combat pay in the calculation for the EITC. And in 2008, the Heroes Earnings Assistance and Relief Tax Act made this election permanent.

How is this beneficial for service members?

The maximum benefit for the EITC actually has a bit of a bell curve. Because this tax credit is designed for people who earn low incomes, the amount you’re eligible for increases as your income increases, but only up until a certain point.

Once you reach the highest available benefit, there’s a plateau and your benefit won’t necessarily change as your income increases. Finally, once you reach a certain income level, your tax credit amount decreases as your income increases.

The benefit of deciding whether combat pay is included in the EITC calculation means service members can make the decision based on their unique financial situation. Taxpayers with much lower household incomes might choose to include their combat pay if it increases their benefit. However, other taxpayers might find that their combat pay actually decreases the tax credit they’re eligible for. In that case, they can simply choose not to include it.

Can combat pay increase the child tax credit?

While combat pay isn’t subject to federal income taxes, it is included in your income for purposes of calculating your child tax credit. While your combat pay won’t increase your child tax credit, it also won’t decrease it unless you have an annual income of $200,000 for a single filer or $400,000 for joint filers.

What are the other benefits and drawbacks of combat pay?

The tax advantages aren’t the only advantage available to military service personnel receiving combat pay. However, just as there are some advantages to combat pay, there are also a few disadvantages.

Erin Gobler

Erin Gobler is a Wisconsin-based personal finance writer with experience writing about mortgages, investing, taxes, personal loans, and insurance. Her work has been published in major outlets, such as SuperMoney, Fox Business, and Time.com.