Tax Issues for Members of the US Armed Forces

The federal income tax laws provide some benefits to individuals who are actively serving in the US Armed Forces. The US Armed Forces is defined in the tax laws to include officers and enlisted personnel in all regular and reserve units controlled by the Secretaries of Defense, Army, Navy, Air Force and Coast Guard.

Under section 112 of the Internal Revenue Code (IRC), compensation that an individual receives for active service in the US Armed Forces is not included in gross income for any month during which that person either served in a combat zone or was hospitalized as a result of wounds, injury or disease suffered because of serving in a combat zone. Even if the individual only serves part of the month in the US Armed Forces, he or she is entitled to the exclusion for the entire month. Pensions, retirement pay and special severance benefits are not considered excludible compensation. However, accrued leave payments may be considered excludible compensation.

The President, in an Executive Order, designates combat zones as areas in which the US Armed Forces are engaging or have engaged in combat. To be eligible for the exclusion, the individual must serve in a combat zone after the beginning date and before the ending date of combat activities in combat zones designated by a President’s executive order. There are currently three designated combat zones: areas of the Arabian Peninsula (starting January 17, 1991); Kosovo area (beginning March 24, 1999); and Afghanistan (beginning September 19, 2001).

Under section 134(a) of the IRC, qualified military benefits are excluded from gross income. A qualified military benefit is any allowance or in-kind benefit, other than personal use of a vehicle, received by a member or former member of the uniformed services or a dependent which was excluded from gross income on September 9, 1986 under any law, regulation or administrative procedure in effect on that date. There are a number of allowances that were authorized as being excluded from gross income on September 9, 1986, including:

  • Disability benefits authorized under 10 U.S.C. Ch. 61
  • Veterans’ benefits authorized under 38 U.S.C. §3101
  • Moving and storage expenses authorized under 37 U.S.C. §§404-412
  • Housing allowances authorized under 37 U.S.C. §§403, 403a or 405
  • Overseas cost-of-living allowances authorized under 37 U.S.C. §405
  • Group term life insurance authorized under 38 U.S.C. §§404-412
  • Dependent education authorized under 20 U.S.C. §921 and 10 U.S.C. §7204
  • Dental care for military dependents authorized under 10 U.S.C. §§1074 or 1078
  • Temporary lodging in connection with certain orders authorized under 37 U.S.C. §404a
  • Travel for consecutive overseas tours authorized under 37 U.S.C. §416
  • Evacuation allowances authorized under 47 U.S.C. §405a
  • Professional education authorized under 10 U.S.C. §§203, 205 or 141
  • Uniform allowances authorized under 37 U.S.C. §§415-418
  • Emergency assistance authorized under 10 U.S.C. §133 and 36 U.S.C. Ch. 1
  • Combat zone compensation and combat-related benefits authorized under 37 U.S.C. §310
  • Burial and death services authorized under 10 U.S.C. §§1481-1482

Section 692 of the IRC provides that there will be no income tax imposed on a taxpayer who dies while serving in a combat zone or as a result of injuries sustained while serving for the year of his or her death or any taxable year ending on or after the first day of service after June 24, 1950. This exclusion also covers victims of terrorist actions and astronauts.

Preparing for a Meeting with Your Tax Attorney

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Preparing for a Meeting with your Tax Attorney

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