Q-2: I am a member of the U.S. Armed Forces performing services in a combat zone. Is any part of my military pay for serving in this area excluded from gross income?

A-2: Yes, if you serve in a combat zone as an enlisted person or as a warrant officer (including commissioned warrant officers) for any part of a month, all your military pay received for military service that month is excluded from gross income. For commissioned officers, the monthly exclusion is capped at the highest enlisted pay, plus any hostile fire or imminent danger pay received.

For 2002, the most an officer could earn tax-free each month was $5,532.90 ($5,382.90, the highest monthly enlisted pay, plus $150 hostile fire or imminent danger pay). The Emergency Wartime Supplemental Appropriations Act of 2003 (P.L. 108-11) raised the imminent danger pay to $225 per month through September 2003.  The 2004 National Defense Authorization Act extended this higher rate through December 2004. For  2003, the monthly combat pay exclusion for officers totals $5,957.70. For 2004, it totals $6,315.90. Amounts excluded from gross income are not subject to federal income tax.

Q-3: My husband and I are both enlisted personnel serving in the U.S. Armed Forces in the combat zone. Are we each entitled to the income tax exclusion for military pay?

A-3: Yes, each of you qualifies for the income tax exclusion for your respective military pay.

Q-4: I am a member of the U.S. Armed Forces stationed on a ship outside any combat zone. I fly missions over a combat zone as part of the military operations in that combat zone. Is any part of my military pay excluded from gross income?

A-4: Yes. The combat zone includes the airspace over it, so you are serving in the combat zone. See Q&A-2 above for a discussion of the amount of your military pay that is excluded.

Q-5: If I am injured and hospitalized while serving in the U.S. Armed Forces in a combat zone, is any of my military pay excluded from gross income?

A-5: Yes. Military pay received by enlisted personnel who are hospitalized as a result of injuries sustained while serving in a combat zone is excluded from gross income for the period of hospitalization, subject to the 2-year limitation provided below. Commissioned officers have a similar exclusion, limited to the maximum enlisted pay amount per month. (See Q&A-2 above.) These exclusions from gross income for hospitalized enlisted personnel and commissioned officers end 2 years after the date of termination of the combat zone.

Q-6: My wife is currently serving in the U.S. Armed Forces in a combat zone and will be eligible for discharge when she returns home. If she is discharged upon her return, will the payment for the annual leave that she accrued during her service in the combat zone be excluded from gross income?

A-6: Yes. Annual leave payments to enlisted members of the U.S. Armed Forces upon discharge from service are excluded from gross income to the extent the annual leave was accrued during any month in any part of which the member served in a combat zone. If your wife is a commissioned officer, a portion of the annual leave payment she receives for leave accrued during any month in any part of which she served in a combat zone may be excluded. The annual leave payment is not excludable to the extent it exceeds the maximum enlisted pay amount (see Q&A-2 above) for the month of service to which it relates less the amount of military pay already excluded for that month.

Q-7: I am an enlisted person serving in a combat zone. If I reenlist early while I am in the combat zone and receive my reenlistment bonus several months later when I am stationed outside the combat zone, is any part of my reenlistment bonus excluded from gross income?

A-7: Yes. The reenlistment bonus is excluded from gross income although received in a month that you were outside the combat zone, because you completed the necessary action for entitlement to the reenlistment bonus in a month during which you served in the combat zone.

Q-8: My brother, who is a civilian in the merchant marine, is on a ship that transports military supplies between the United States and the combat zone. Is he entitled to the combat zone military pay exclusion?

A-8: No. Those serving in the merchant marine are not members of the U.S. Armed Forces. The combat zone military pay exclusion applies only to members of the U.S. Armed Forces. Neither federal civilian employees nor civilian defense contractors deployed with U.S. forces qualify for an exclusion of income earned while working in a combat zone or qualified hazardous duty area. They may, however, qualify for an extension of deadlines to file and pay taxes.

The U.S. Armed Forces include all regular and reserve components of the uniformed services that are under the control of the Secretaries of Defense, Army, Navy, and Air Force, and the Secretary of Homeland Security with respect to the Coast Guard.

Q-9: My husband is a member of the U.S. Armed Forces performing services related to a combat operation but he is not in the combat zone and he is not receiving hostile fire/imminent danger pay. Is he entitled to the military pay exclusion?

A-9: No. U.S. Armed Forces personnel serving outside the combat zone are not entitled to the military pay exclusion unless they are serving in direct support of military operations in the combat zone for which they receive hostile fire/imminent danger pay. The Department of Defense certifies areas that meet these requirements.

Q-10: How do I certify my entitlement to the military pay exclusion?

A-10: Your service branch must certify your entitlement on the Form W-2 it provides you. If you believe you are entitled to the exclusion, but it is not reflected on your Form W-2, ask your service branch to issue a corrected Form W-2.

Q-11: I have been serving in a combat zone since last November. I understand that the deadline for performing certain actions required by the tax laws is extended as a result of my service. When did these deadline extensions begin for me?

A-11: The deadline extension provisions apply to most tax actions required to be performed on or after the beginning date for your combat zone, or the date you began serving in that combat zone, whichever is later. In your case, the deadline extensions began the day you started serving in the combat zone last November.

Q-12: My son is a member of the U.S. Armed Forces who has been serving in a combat zone since March 1. Is he entitled to an extension of time for filing and paying his federal income taxes? Are any assessment or collection deadlines extended?

A-12: For both questions, the answer is yes. In general, the deadlines for performing certain actions applicable to his taxes are extended for the period of his service in the combat zone, plus 180 days after his last day in the combat zone. This extension applies to the filing and paying of your son's income taxes that would have been due April 15. In addition to the 180 days, his extension period will include the 46 days that were left before the April 15th deadline when he entered the combat zone.  During his 226-day extension period, assessment and collection deadlines will be extended, and he will not be charged interest or penalties attributable to the extension period.

Q-13: Assuming the same facts as in question 12, does the extension for filing and paying his individual income taxes apply to unearned income from my son’s investments?

A-13: Yes. The extensions apply without regard to the source of your son's income.

Q-14: Assuming the same facts as in question 12, will the deadline extension provisions continue to apply if my son is hospitalized as a result of an injury sustained in the combat zone?

A-14: Yes. The deadline extension provisions will apply for the period that your son is continuously hospitalized outside of the United States as a result of injuries sustained while serving in a combat zone, including 180 days thereafter. For hospitalization inside the United States, the extension period cannot be more than 5 years.

Q-15: My son is a member of a unit of the U.S. Armed Forces and most members of the unit have been serving in a combat zone since April 1. My son has been overseas since February 1, but he did not enter the combat zone until May 1. Is he entitled to an extension of time for filing and paying his federal income taxes that were due April 15?

A-15: No. The extension applies only to a deadline arising on or after the date your son entered the combat zone on May 1.

Q-16: Do the deadline extension provisions apply only to members of the U.S. Armed Forces serving in the combat zone?

A-16: No. Unlike the combat zone military pay exclusion, the deadline extensions also apply to individuals serving in the combat zone in support of the U.S. Armed Forces, such as merchant marines serving aboard vessels under the operational control of the Department of Defense, Red Cross personnel, accredited correspondents, and civilian personnel acting under the direction of the U.S. Armed Forces in support of those forces.

Q-17: Do the deadline extensions apply only to those within a combat zone?

A-17: No. Members of the U.S. Armed Forces who perform military service in an area outside a combat zone qualify for the suspension of time provisions if their service is in direct support of military operations in the combat zone, and they receive special pay for duty subject to hostile fire or imminent danger as certified by the Department of Defense. Q&A-1 lists various combat zones and the support areas certified by the Department of Defense. The Military Family Tax Relief Act of 2003 further applied the deadline extension provisions to those serving in a Contingency Operation, as designated by the Secretary of Defense.

Q-18: My son is a civilian explosive specialist who is in a combat zone training U.S. Armed Forces personnel serving in a combat zone. Do the deadline extension provisions apply to my son?

A-18: Yes. The deadline extension provisions apply to your son because he is serving in a combat zone in support of the U.S. Armed Forces.

Q-19: My husband is a private businessman working in a combat zone on nonmilitary projects. Do the deadline extension provisions apply to my husband?

A-19: No. Other than military personnel, the only individuals working in a combat zone that are entitled to the deadline extension provisions are those serving in support of the U.S. Armed Forces.

Q-20: I am a member of the U.S. Armed Forces serving in a combat zone. Do the deadline extension provisions apply to my husband who is in the United States?

A-20: Yes. The deadline extension provisions apply not only to members serving in the U.S. Armed Forces (or individuals serving in support thereof) in the combat zone, but to their spouses as well, with two exceptions. First, if you are hospitalized in the United States as a result of injuries received while serving in a combat zone, the deadline extension provisions would not apply to your husband. Second, the deadline extension provisions for your husband do not apply for any tax year beginning more than 2 years after the date of the termination of the combat zone designation.

Q-21: Assuming the same facts as in question 20, will my husband have to file a joint tax return in order to benefit from the deadline extension provisions?

A-21: No. The deadline extension provisions apply to both spouses whether joint or separate returns are filed. If your husband chooses to file a separate return, he will have the same extension of time to file and pay his taxes that you have.

Q-22: My husband is serving in the U.S. Armed Forces in a combat zone. Last year, our son, who is 12 years old, received interest income on which he owes tax because the amount exceeded his standard deduction. Our daughter, who is 17 years old, received both investment income and earned income from a part-time job.  She is entitled to a refund of part of the tax withheld from her pay. We claim both children as dependents on our federal individual income tax return. Must I file individual income tax returns for our children while my husband is in the combat zone?

A-22: No. Filing individual income tax returns for your dependent children is not required while your husband is in the combat zone. Instead, these returns will be timely if filed on or before the deadline for filing your joint income tax return under the applicable deadline extensions. When filing your children’s individual income tax returns, put "COMBAT ZONE" in red at the top of those returns. Because your older child is entitled to a refund, she may want to file her income tax return and obtain her refund without regard to the extension.

Q-23: I am a member of the U.S. Armed Forces serving in a combat zone. My spouse and our three children live in our home in the United States. During the year, a child care provider took care of our children in our home. We are required to file a Schedule H, Household Employment Taxes, as an attachment to our joint income tax return to report the employment taxes on wages we paid to our child care provider. Does the deadline extension apply to the filing of Schedule H as an attachment to our income tax return?

A-23: Yes. The deadline extension applies to all schedules and forms that are filed as attachments to an income tax return.

Q-24: Almost two years ago, the IRS contacted me to collect tax on a joint income tax return I had filed with my now former spouse. I believe only my former spouse should be held liable for the tax. I understand that I may file Form 8857, Request for Innocent Spouse Relief, within 2 years of the first collection activity against me by the IRS. I have just entered a combat zone. Do the deadline extensions apply to the filing of Form 8857?

A-24: Yes. In addition to deadlines for filing and paying taxes, there are various time-sensitive acts for which performance may be postponed because of combat zone service. The 2-year period after the first collection activity for requesting innocent spouse relief is one of these.  Other examples are the 90-day limit for filing a Tax Court petition, the 30-day limit for requesting a Collection Due Process hearing, the 60-day period for rolling over a distribution from a qualified tuition plan or Coverdell Education Savings Account into another such plan or ESA, respectively, and the annual distribution from a retirement plan of substantially equal amounts to avoid an excise tax for premature distributions.

Q-25: I served in the U.S. Armed Forces in Afghanistan from April 1, 2002, until August 31, 2002. I was reassigned to the Arabian Peninsula Areas on March 5, 2003. I understand that I was entitled to an extension of time for filing and paying my 2001 income taxes of 195 days (180 days plus the 15-day period that was left before the April 15, 2002 deadline). This extension period would have expired on March 14, 2003 -- 195 days from September 1, 2002 (my first day out of the combat zone in Afghanistan). What effect does my reentry into a combat zone have on my extension for filing and paying my 2001 income taxes?

A-25: Because the extension period had not expired for your 2001 individual income tax return before you reentered a combat zone, a new 180-day period will begin after you leave a combat zone for the second time. In addition, any time that remained in the 15-day period when you entered the Arabian Peninsula Areas adds to the new 180-day period when you leave the Arabian Peninsula Areas. In determining how much of the 15-day period is unused, treat the 180-day period as being used first. In your case, on March 5, 2003, 10 of the 15 days remained. After you leave the Arabian Peninsula Areas, you will have a 190-day extension period for filing and paying your 2001 income taxes. You will have a 222-day period (180 days plus the 42 days that remained before April 15, 2003) to file and pay your 2002 taxes.

Q-26: My wife is a member of the U.S. Armed Forces serving in a combat zone. Can she make a timely qualified retirement contribution for last year to her individual retirement account (IRA) after April 15 this year but on or before the due date of her individual income tax return after applying the deadline extension provisions?

A-26: Yes. Your wife can make a timely qualified retirement contribution for the year to her IRA on or before the extended deadline for filing her income tax return for that year under the extension provisions.

Q-27: My brother, who began serving in the U.S. Armed Forces in a combat zone in early January, did not make his fourth estimated tax payment for the year, due January 15. Will he be liable for estimated tax penalties?

A-27: No. Your brother is covered by the deadline extension rules and will not be liable for any penalties if he files and pays any tax due by his extended filing due date. When your brother files his income tax return, he should put "COMBAT ZONE" in red at the top of that return.

Q-28: My son, who is a member of the U.S. Armed Forces, was on an installment payment plan with the IRS for back income taxes before he was assigned to a combat zone. What should be done now that he is in the combat zone?

A-28: The IRS office where your son was making payments should be contacted. Because your son is serving in a combat zone, he will not have to make payments on his past due taxes for his period of service in the combat zone plus 180 days. No additional penalties or interest will be charged during this deadline extension period.

Q-29: My son, who is a member of the U.S. Armed Forces serving in a combat zone, will file his individual income tax return for last year after the regular April 15 due date, but on or before the end of the deadline extension for filing that return. He expects to receive a refund. Will the IRS pay interest on the refund?

A-29: Yes. The IRS will pay interest from the April 15 due date on a refund issued to your son if he files his individual income tax return on or before the due date of that return after applying the deadline extension provisions. When your son files, he should put "COMBAT ZONE" in red at the top of that return. If his return is not timely filed on or before the extended due date, no interest will be paid on the refund except as provided under the normal refund rules. Even though the deadline is extended, your son may file a return earlier to receive any refund due.

Q-30: Do the deadline extension provisions apply to tax returns other than the individual income tax return?

A-30: Yes. The deadline postponement provision also applies to estate, gift, employment, and excise tax returns. However, the provision only applies to employment and excise tax returns of individual, sole-proprietors (generally Schedule C filers) in a combat zone. The provision does not apply to other tax and information returns, such as those for corporate income taxes, or to employment or excise taxes of an entity, such as an S Corporation or Limited Liability Company (LLC) where the owner or main person is in the combat zone.

Q-31: My husband and I are civilian employees of defense contractors. I work in the United States and my husband temporarily works in Germany. Our jobs involve the production of equipment used by the U.S. Armed Forces for a combat zone operation. Do the deadline extension provisions apply to either of us?

A-31: No. The deadline extension provisions do not apply to civilian employees of defense contractors unless they are serving in a combat zone in support of the U.S. Armed Forces.

Miscellaneous Provisions

Military Differential Pay

Q-38: What is military differential pay?

A-38: Differential pay is defined as payments made voluntarily by an employer to represent the difference between the regular salary of an employee called to military active duty and the amount being paid by the military, if the regular salary was higher. For purposes of the following questions and answers, the term differential pay also includes military continuation pay, active duty differential payments required by state statutes or payments made by certain states or commonwealths that pay a stipend or a set dollar amount to their employees called to military active duty.

Q-39: If an employer pays military differential pay to an employee called to active duty, are these payments considered wages?

A-39: For federal tax purposes, the employment relationship between the employee and the company was terminated when the worker was called for active military service with the U.S. government or for active service with the state National Guard. Under the circumstances, the payments made by the company to the former employees while they are in military service with the U.S. government or active service with the state National Guard are not "wages" for services performed in "employment" for the companies. These payments, therefore, are not "wages" subject to the taxes imposed by the Federal Insurance Contributions Act and the Federal Unemployment Tax Act or to the Collection of Income Tax at Source on Wages.

• Reference: IRS Revenue Ruling 69-136

Q-40: What is the tax treatment of military differential pay?

A-40: Certain compensation received for active service in a combat zone by members of the Armed Forces of the United States is excludable from gross income. However, this exclusion applies only to compensation paid by the Armed Forces of the United States to members of the Armed Forces. Compensation paid by other employers (whether private enterprises or governmental entities) to members of the Armed Forces cannot be excluded as combat zone compensation even if the recipient is performing active military service in a combat zone at the time the payment is made. See Military Pay Exclusion — Combat Zone Service for more information on the taxability of combat zone compensation.

Q-41: If an employee is called to active duty and receives military differential pay, how are these payments reported by the employer to the employee?

A-41: Employers should report military differential pay on Form 1099-MISC, Box 3: Other Income. Do not use Form W-2 for these payments. Employers should not withhold FICA or income tax from these payments and the payments are not subject to FUTA taxes.

Q-42: How does a person who receives military differential pay report this on the federal income tax return?

A-42: The recipient reports the Form 1099-MISC amount on Line 21 of Form 1040 (Other Income) and lists the type as Military Differential Pay. No self-employment tax is due because the income from these payments is not derived from any trade or business conducted by the taxpayer for self-employment tax purposes.

Q-43: Since these payments are considered income but not “wages” subject to withholding, what should persons receiving these payments do to avoid owing large amounts of tax when they file their returns?

A-43: Since the employer is not required to withhold income tax, the recipient should prepare for the tax liability by making quarterly estimated tax payments.

One option is for the taxpayer to sign up for the Electronic Federal Tax Payment System (EFTPS), which enables the person to schedule payments directly from a bank account for up to a year in advance. This is a preferred method, since it is easiest for both the taxpayer and the government and ensures prompt and accurate crediting of payments to the taxpayer's account. Other options are to make credit card payments or send checks with Form 1040-ES vouchers. Get more information on electronic payment methods or see IRS Publication 505, Tax Withholding and Estimated Tax (PDF 402K).

Social Security Taxes (FICA)

Q-44: Are there any benefit reductions due to FICA not being withheld by the employer?

A-44: Military personnel have FICA taken out of their military pay even when serving in a combat zone. Thus, they will get Social Security credit for their military earnings. However, Social Security retirement benefits are based on a worker’s total earnings history. Since the military differential pay is not subject to FICA, the person’s Social Security retirement benefits may be reduced.

Q-45: How does an employer correct the Form 941 (Quarterly Employment Tax Return) if FICA and income taxes have been erroneously withheld?

A-45: Generally, you can correct errors on Forms 941 for prior quarters by making an adjustment on your Form 941 for the quarter during which the error is discovered. The adjustment increases or decreases your tax liability for the quarter in which it is reported and is interest-free. You must provide background information and certifications supporting prior quarter adjustments. You do this by filing a Form 941C, Supporting Statement to Correct Information, with your current quarter. Do not file Form 941C separately. The IRS will not be able to process your adjustments on Form 941 without this supporting information.

If excess FICA was paid in a prior period, you can also recover the excess amount by filing a refund claim using Form 843. You must file Form 941C, or equivalent statement, with Form 843. See the separate instructions for Form 843. 

Related Items:

• Form 843, Claim for Refund and Request for Abatement (PDF 46K)

• Instructions for Form 843 ( PDF 26K)

• Form 941C, Supporting Statement To Correct Information ( PDF 85K)

Q-46: How does an employee recover FICA taxes that were erroneously withheld by the employer?

A-46: Employees are encouraged to contact their employers and request that they seek a refund of the erroneously withheld FICA on the employees' behalf. Because employers also pay a portion of FICA that is not withheld from payments to the employee, the employer will also be entitled to a refund. The employer may have other similarly situated employees who are entitled to refunds and the IRS can process a single refund claim filed by the employer more efficiently than it can process numerous refund claims filed by individual employees. If the employer refuses to seek a refund on the employee's behalf, the employee may file a refund claim using Form 843. Line 5 is where the employee explains the reaseon for the refund and efforts made to secure it. The employee's claim for refund must include a statement from the employer indicating whether the employer has reimbursed any of the erroneously withheld FICA to the employee or filed a refund claim for any of the erroneously withheld FICA.

Other Benefits

Q-47: What is the tax treatment of health care benefits and coverage while the employee is on active military duty?

A-47: Generally, the gross income of an employee does not include employer-provided coverage under an accident or health plan or employer contributions to such plans. This exclusion from gross income extends to employees who are on military leave. The value of employer-provided coverage, or employer contributions to accident or health plans, are not reported on the Form 1099-MISC given to the employee.

Q-48: Is the cost of group term life insurance included in gross income while the employee is on military pay?

A-48: The tax treatment of group term life insurance coverage provided to employees on military leave is the same as coverage provided to current employees. Generally, the cost of $50,000 of group term life insurance coverage is not included in gross income while the employee is on military leave.

Q-49: If an employer pays an employee who is called to active duty his vacation pay is this pay subject to social security, Medicare and income taxes?

A-49: Yes, vacation pay that is earned or accrued prior to the worker being called for active duty or active service is subject to withholding as if it were a regular wage payment, even if paid to the worker after activation. When vacation pay is in addition to regular wages for the vacation period, treat it as a supplemental wage payment. If the vacation pay is for a time longer than your usual payroll period, spread it over the pay periods for which you pay it. Vacation pay that is earned or accrues after the employment relationship is terminated by activation is not a wage payment.

Q-50: If a co-worker wants to donate vacation time to an employee who is called to active duty to whom is such leave taxable?

A-50: The donated vacation time is taxable to the recipient of the vacation time. As a result, the employee on active duty receiving donated vacation pay is subject to withholding of social security, Medicare and income taxes as if it were a regular wage payment. When vacation pay is in addition to regular wages for the vacation period, treat it as a supplemental wage payment. If the vacation pay is for a time longer than your usual payroll period, spread it over the pay periods for which you pay it. 

Q-51: An employee received an award from the employer and wishes to donate it to a co-worker who has been called to active duty. To whom is the award taxable?

A-51: The award is taxable to the recipient. The recipient’s award is subject to withholding of social security, Medicare and income taxes as if it were a regular wage payment. When an award is in addition to regular wages, treat it as a supplemental wage payment