Combat Zone Tax Exclusion

What is a Combat Zone Tax Exclusion or CZTE? This federal tax break on military income is intended for military members assigned to a combat zone. In general, it excludes basic pay (with certain limits) from federal income tax while it is earned in the combat zone. These tax breaks apply to other military-related jobs, which we’ll explore below.

The combat zones are determined by the Commander-in-Chief. They are subject to change depending on mission requirements and other variables. Some combat zone designations have expiration dates, while others are open ended.

What follows is not tax advice. This article should be considered a reference for service members and their families to help investigate tax options, but the advice of a tax professional should always be part of any decisions made when filing tax returns. Tax laws change frequently. Always consult the IRS official site or a tax professional for the current year’s guidance.

How the Combat Zone Tax Exclusion Works

The Combat Zone Tax Exclusion is a tax benefit which must be applied for when filing the current year’s tax returns or when filing amended returns for previous tax years. The CTZE has evolved over the years. Some military members who were not considered eligible in past tax years may be eligible now due to reclassification of certain military duty as combat or combat related. We’ll explore more about that below.

The IRS maintains a list of “eligible members” organizations which is not limited to branches of the military. It also applies to support organizations such as the Red Cross and members of other government agencies that may also be supporting military operations in a combat zone.

For military members, the tax break is simple. For enlisted members and warrant officers, there is no limit or cap on the amount of basic pay that is exempt from federal taxation while the wage earner is in the combat zone.

For officers, there is a limit. Tax-excluded military basic pay is capped at the highest rate of enlisted basic pay plus imminent danger/hostile fire pay. These amounts change from year to year. So, you will need to check current military pay charts to see what the tax-exempt limit for military officers may be in the current tax year.

How The IRS Classifies A Combat Zone

The Internal Revenue Service itself does not classify what regions are considered combat zones. That is a job for the Commander-in-Chief. But the IRS does have a broad definition of what kinds of combat duty may qualify for this federal tax break for military income.

According to the IRS official site, the phrase “combat zone” includes, but is not limited to the following:

• Actual combat areas
• Direct combat support areas
• Qualified hazardous duty areas
• For IRS deadline extensions, the term “combat zone” also includes contingency operations areas

How The IRS Classifies “Eligible Members”

There is a set of requirements for those who wish to claim military tax benefits on their federal income tax forms. The Internal Revenue Service makes a distinction between those who serve in the United States military, those in “support organizations,” and those who serve in the “uniformed services” such as National Oceanic and Atmospheric Administration (NOAA) Commissioned Officer Corps.

The distinction is for classification purposes. Those who serve in the military or the uniformed services are eligible to claim military tax breaks. The IRS defines military service as any of the following and those who have retired or separated from any of these may also qualify:

• United States Army (including Army Reserve and Army National Guard)
• United States Navy (including Navy Reserve)
• United States Air Force (including Air Force Reserve and Air National Guard)
• United States Marine Corps (including Marine Corps Reserve)
• United States Coast Guard (including Coast Guard Reserve)

Uniformed Services of the United States include:

• United States Public Health Service Commissioned Corps
• National Oceanic and Atmospheric Administration Commissioned Officer Corps

Support organizations are defined as those “directly supporting military operations.” Any employee working in a combat zone or other designated area the IRS deems eligible for the tax break may apply for it. These employees include:

• Civilian Employees
• Contractors
• Red Cross Members

IRS Requirements for Claiming Combat Zone Tax Exclusions

What follows are the IRS requirements for claiming any combat-related tax exclusions. The applicant must be an eligible member (see above) meeting at least one of the following and who serves in a designated area. These requirements are broken down by the Internal Revenue Service as options:

• Option One: Service in an active combat area as designated by Executive Order and authorized to draw special pay for duty “subject to hostile fire or imminent danger as certified by the Department of Defense.”
• Option Two: Service in a support area as designated by the Department of Defense “in direct sustainment of military operations” in the combat zone and authorized to draw special pay for duty “subject to hostile fire or imminent danger as certified by the Department of Defense.”
• Option Three: Service in a “statutorily designated Qualified Hazardous Duty Area” and authorized for special pay for duty “subject to hostile fire or imminent danger as certified by the Department of Defense.”

Recognized Combat Zones

The following areas have been or are currently designated as combat zones for the purpose of Combat Zone Tax Exclusions. This list is subject to change due to legislation, declaration of an end to hostilities, Presidential order, or other factors. Always consult a tax professional or the IRS official site to learn what the most current combat zones may be. At the time of this writing the following areas are or were considered recognized combat zones.

• Sinai Peninsula
• Afghanistan Area, including:
  • Jordan, Kyrgyzstan, Pakistan, Tajikistan, and Uzbekistan (as of September 19, 2001)
  • Philippines (from January 9, 2002 through September 30, 2015 in support of Operation Enduring Freedom)
  • Djibouti (as of July 1, 2002)
  • Yemen (as of April 10, 2002)
  • Somalia and Syria (as of January 1, 2004)
• Kosovo Area, including:
  • The Federal Republic of Yugoslavia (Serbia/Montenegro)
  • Albania
  • Kosovo
  • The Adriatic Sea
  • The Lonian Sea – north of the 39th parallel
• Arabian Peninsula Area, including:
  • The Persian Gulf
  • The Red Sea
  • The Gulf of Oman
  • The part of the Arabian Sea that is north of 10 degrees north latitude and west of 68 degrees east longitude
  • The Gulf of Aden
  • The total land areas of Iraq, Kuwait, Saudi Arabia, Oman Bahrain, Qatar, and the United Arab Emirates

Other combat zones including Jordan (as of March 19, 2003) and Lebanon (as of February 12, 2015) “due to their direct support of military operations in the Arabian Peninsula combat zone” according to IRS.gov.

2018 Legislation Gives More Military Members Access to Combat Zone Tax Exclusions

At one time, military members could not claim certain combat-related tax exclusions because they technically did not qualify since their primary residence was listed in the United States. But the 2018 Bipartisan Budget Act changed the “tax home requirement” allowing military members to claim a “foreign earned income exclusion” even if the military member’s listed home address is stateside.

The IRS official site says these taxpayers, if eligible, “will be able to claim the foreign earned income exclusion on their income tax return for 2018 when they file.” This would allow those claiming a combat related tax exemption to choose to exclude “their foreign earned income from gross income, up to a certain dollar amount. For tax year 2018, that limit is $103,900” according to a press release by the Internal Revenue Service.

Thanks to such changes, some military members can file amended tax returns to claim this benefit. This is true for some three thousand troops who served in the Sinai Peninsula combat area as far back as 2015.

Tax reform makes it possible for these troops to claim their combat tax exemptions. In this particular case, the access to this tax benefit was dependent on lawmakers reclassifying the area to include it as an area of potential hostile fire.

Foreign earned income exclusion, like most tax breaks, is not automatic. Claiming combat zone tax benefits will include filling out additional tax forms such as Form 2555 or Form 2555-EZ attached. For any combat-related tax exclusion, you should consult the IRS for the proper forms designated or ask a tax professional for assistance.