Combat pay includes all of a military service member’s income while they are in a combat zone, including the additional stipend they’re eligible for. They receive certain tax benefits on this pay, including the ability to exclude it from their taxable earned income.
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:
|Sinai Peninsula||Syria||Gulf of Aden|
|Pakistan||Adriatic Sea||Oman Bahrain|
|Uzbekistan||Persian Gulf||United Arab Emirates|
|Yemen||Gulf of Oman|
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 much combat pay can you earn now?
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.
Here is a list of the benefits and drawbacks to consider.
- Family separation allowance. The government also offers another stipend — known as the family separation allowance (FSA) — to service members with dependents. They can earn an additional $250 per month, which accrues from the day of deployment to the day they arrive back at their home station.
- Savings Deposit Program. This is a savings account that allows deposits of up to $10,000 and earns a guaranteed annual return of 10%. Service members can only participate while they are in a designated combat zone for at least 30 consecutive days or at least one day for three consecutive months.
- Education benefits. Service members entering (or re-entering) higher education may receive adjusted interest rates on federal student loans, student loan deferment during active duty, special scholarships for service members and their children, and additional support from your school.
- Payroll taxes. While combat pay can be excluded for purposes of federal (and often state) income taxes, it can’t be excluded from the Social Security or Medicare tax (known as payroll taxes). Combat pay will still be subject to those taxes, which equals 7.65% of gross income.
- Income included in FAFSA. Even though combat pay isn’t counted as income for federal income taxes, it is when calculating federal student aid eligibility. When you complete your Free Application for Federal Student Aid (FAFSA), you’ll have to report any combat pay earned by either yourself or your parents (if you’re a dependent student). This income could reduce the amount of financial aid you’re eligible for.
- Combat pay includes all active duty pay, reenlistment bonuses, hostile fire or imminent danger pay, and other income someone earns while deployed in a combat zone.
- This form of pay is exempt from federal income taxes, as well as from state income taxes in many states.
- Service members receiving combat pay also earn additional benefits. This includes a family separation allowance if you have children, access to a special high-interest savings account, and flexibility with the Earned Income Tax Credit (EITC).
- Combat pay is still subject to Social Security and Medicare taxes and still counts as income for the purpose of determining federal student aid eligibility.
View Article Sources
- Military and Clergy Rules for the Earned Income Tax Credit — IRS
- How much combat pay or special combat pay did you report in your adjusted gross income? — Federal Student Aid
- Combat-Related Special Compensation (CRSC) — U.S. Department of Veterans Affairs
- IRS Letters and Notices: What To Do If You Got One — SuperMoney
- IRS Form 8300 – The Definitive Guide — SuperMoney
- How To File Taxes in 2022: Complete Guide — SuperMoney
- What Happens If You File Taxes Late? — SuperMoney
- 10 Common Mistakes When Filing Your Taxes — SuperMoney