Tax Information Relating To Combat Zones

Here are the answers to some of your most frequently asked questions direct from the IRS

Q-1: What geographic areas are considered combat zones? A-1: Combat zones are designated by an Executive Order from the President as areas in which the U.S. Armed Forces are engaging or have engaged in combat.  There are currently three such combat zones (including the airspace above each):

• Persian Gulf area, beginning Jan. 17, 1991 -- the Persian Gulf, Red Sea, Gulf of Oman, the part of the Arabian Sea north of 10° North latitude and west of 68° East longitude, the Gulf of Aden, and the countries of Bahrain, Iraq, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates.

• Kosovo area, beginning Mar. 24, 1999 -- Federal Republic of Yugoslavia (Serbia and Montenegro), Albania, the Adriatic Sea and the Ionian Sea north of the 39th Parallel.

• Afghanistan, beginning Sept. 19, 2001.

Public Law 104-117 designates three parts of the former Yugoslavia as a Qualified Hazardous Duty Area, to be treated as if it were a combat zone, beginning Nov. 21, 1995, Bosnia and Herzegovina, Croatia, and Macedonia. In addition, the Department of Defense has certified these locations for combat zone tax benefits due to their direct support of military operations in the Afghanistan combat zone (Operation Enduring Freedom), beginning on the listed dates:

• Pakistan, Tajikistan and Jordan - Sept. 19, 2001

• Incirlik Air Base, Turkey - Sept. 21, 2001

• Kyrgyzstan and Uzbekistan - Oct. 1, 2001

• Philippines - Jan. 9, 2002

• Yemen - Apr. 10, 2002

• Djibouti - July 1, 2002

Military Pay Exclusion

Q-2: I am a member of the US 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 2001, the most an officer could earn tax-free each month was $5,043 ($4,893, the highest monthly enlisted pay, plus $150 hostile fire or imminent danger pay). For 2002, this limit was $5,532.90 and for 2003, it is $5,882.70. 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 US 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 US 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 US 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, but it is limited to the maximum enlisted 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 US 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 US Armed Forces upon discharge from the service are excluded from gross income to the extent the 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 leave payment cannot be excluded to the extent it exceeds the maximum enlisted 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 Renaults 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 US Armed Forces. The combat zone military pay exclusion applies only to members of the US Armed Forces. The US 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 Transportation with respect to the Coast Guard.

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

A-9: No. US 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.

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.

Extension of Deadlines

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 US Armed Forces who is now serving in a combat zone. 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 federal taxes are extended for the period of his service in the combat zone plus 180 days thereafter. During this extension period, assessment and collection deadlines will be extended, and interest and penalties attributable to the extension period will not be charged.

Q-13: Assuming the same facts as in question 12, does the extension for filing and paying his federal 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: Do the deadline extension provisions apply only to members of the US Armed Forces serving in the combat zone? A-15: No. The deadline extension provisions also apply to individuals serving in the combat zone in support of the US Armed Forces, such as Red Cross personnel, Merchant Marine personnel, accredited correspondents, and civilian personnel acting under the direction of the US Armed Forces in support of those forces. In addition, members of the US Armed Forces who perform military service in an area outside the 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-16: My son is a civilian explosive specialist who is in a combat zone training US Armed Forces personnel serving in a combat zone. Do the deadline extension provisions apply to my son?

A-16: Yes. The deadline extension provisions apply to your son because he is serving in a combat zone in support of the US Armed Forces.

Q-17: My husband is a private businessman working in a combat zone on nonmilitary projects. Do the deadline extension provisions apply to my husband?

A-17: No. Other than military personnel, the only individuals working in the combat zone that are entitled to the deadline extension provisions are those serving in support of the US Armed Forces.

Q-18: I am a member of the US Armed Forces serving in a combat zone. Do the deadline extension provisions apply to my husband who is in the United States?

A-18: Yes. The deadline extension provisions apply not only to members serving in the US 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-19: Assuming the same facts as in question 18, will my husband have to file a joint tax return in order to benefit from the deadline extension provisions?

A-19: 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-20: My husband is serving in the US Armed Forces in a combat zone. Last year, our son, who is 12 years old, received $800 of interest income. Our daughter, who is 17 years old, received $3,500 of earned income from part-time work and $900 of interest income. We claim both children as dependents on our federal individual income tax return. Are federal individual income tax returns required to be filed for our children while my husband is in the combat zone?

A-20: No. Federal individual income tax returns for your dependent children are not required to be filed while your husband is in the combat zone. Instead, these returns will be considered timely if filed on or before the deadline for filing your federal individual income tax return under the deadline extension provisions. When your children's federal income tax returns are filed, you should put the appropriate combat zone designation (e.g., "Enduring Freedom" for Afghanistan) in red at the top of those returns. If your older child had tax withheld from her pay and is entitled to a refund, she may want to file her federal individual income tax return now to obtain her refund.

Q-21: I am a member of the US 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 federal individual income tax return to report the federal employment taxes on wages we paid to our child care provider. Do the deadline extension provisions apply to the filing of Schedule H as an attachment to our federal individual income tax return?

A-21: Yes. The deadline extension provisions apply to all schedules and forms that are filed as attachments to the federal individual income tax return.

Q-22: I am a member of the US Armed Forces who served in a combat zone beginning on September 28, 2002. If I serve in the combat zone until May 23, 2003, when will I be required to file my federal individual income tax return for 2002?

A-22: You must file your 2002 federal individual income tax return on or before March 3, 2004, 285 days after you left the combat zone. The deadline extension period consists of the sum of the following:

1. 180 days from the date you left the area -- 180

2. The number of days remaining (as of the date you entered the area) to perform the required act (in your case, filing your 2002 federal individual income tax return, January 1, 2003, to April 15, 2003) -- 105

   Total 285

Q-23: My wife is a member of the US 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 this April 15 but on or before the due date of her federal individual income tax return after applying the deadline extension provisions? A-23: 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 deadline extension provisions. Q-24: My brother, who began serving in the US Armed Forces in a combat zone in November, did not make his fourth estimated tax payment which was due January 15. Will he be liable for estimated tax penalties?

A-24: No. Your brother is covered by the deadline extension provisions 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 federal income tax return, he should put the appropriate combat zone designation in red at the top of that return.

Q-25: My son, who is a member of the US 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-25: 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-26: My son, who is a member of the US Armed Forces serving in a combat zone, will file his federal 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-26: Yes. The IRS will pay interest from the April 15 due date on a refund issued to your son if he files his federal 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 the appropriate combat zone designation in red at the top of that return. If his return is not timely filed on or before the due date after applying the deadline extension provisions, 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-27: Do the deadline extension provisions apply to federal tax returns other than the federal individual income tax return?

A-27: Yes. The deadline extension provisions also apply to federal estate and gift tax returns. However, the deadline extension provisions do not apply to other federal tax and information returns, such as those for corporate income tax or employment taxes.

Q-28: 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 US Armed Forces for a combat zone operation. Do the deadline extension provisions apply to either of us?

A-28: 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 US Armed Forces.

Miscellaneous Provisions

Q-29: My daughter is a member of the US Armed Forces serving in a combat zone. She makes calls to me here in the United States. Are these calls exempt from the federal excise tax on toll telephone service?

A-29: Yes. Telephone calls that originate within a combat zone and that are made by members of the US Armed Forces serving there are exempt from the federal excise tax on toll telephone service, provided a properly executed certificate of exemption is furnished to the telephone service provider receiving payment for the call. The exemption certificate should be in substantially the following form:

EXEMPTION CERTIFICATE

(Overseas Telephone Calls)

(Date)..........20...

I certify that the toll charges of $.......... are for telephone or radio telephone messages originating at..............(Point of origin) within a combat zone from..............(Name) a member of the Armed Forces of the United States performing service in such combat zone; that the transmission facilities were furnished by ......(Name of carrier); and that the charges are exempt from tax under section 4253(d) of the Internal Revenue Code.

………………………..........

(Signature of Subscriber)

………...............................

(Address)

Note: Penalty for fraudulent use: fine or imprisonment or both.

Q-30: If the federal excise tax has already been paid on the toll telephone service described in Q&A-29, can a refund be obtained?

A-30: Yes. If the federal excise tax has already been paid on that toll telephone service, a refund may be obtained either from the telephone service provider that collected the tax, or from the IRS by filing Form 8849, Claim for Refund of Excise Taxes, with its Schedule 6.

Q-31: How will my military pay for active service in the US Armed Forces in the combat zone be reported on my Form W-2, Wage and Tax Statement?

A-31: Military pay attributable to your active service in the combat zone that is excluded from gross income will not be reported on your Form W-2 in the box marked "Wages, tips, other compensation." However, military pay for such service is subject to social security and Medicare taxes and will be reported on your Form W-2 in the boxes marked "Social security wages" and "Medicare wages and tips." If you believe you are entitled to the exclusion, but it is not reflected on your W-2, ask your service to issue a corrected Form W-2.

Q-32: I'm an officer who served in one combat zone from the year before last until the middle of last year, then went to another combat zone for the remainder of the year. I made monthly contributions to an individual retirement account (IRA) for the year. In view of the military pay exclusion for my service in the combat zone, I may have little or no taxable compensation and may not be eligible to make an IRA contribution for last year. If my taxable compensation is less than the amount I put into my IRA, should I withdraw the portion of my contributions that exceeds my taxable compensation?

A-32: Yes. In general, any amount contributed to your IRA that is more than the smaller of (1) your taxable compensation or (2) $3000 ($3500 if you are age 50 or over), is an excess contribution and must be withdrawn to avoid a 6 percent excise tax. If you are married and file a joint return, you may still be eligible to make an IRA contribution based on your spouse's taxable income. If this is not the case, once you are sure that your taxable compensation will be less than $3000, you should withdraw the portion of your contributions that exceeds your taxable compensation. You will not be taxed on the distributed amount if you receive the distribution on or before the deadline for filing your federal income tax return after applying the deadline extension provisions. You may not take a deduction with respect to these distributed contributions. You must also withdraw the amount of net income attributable to the distributed contributions while they were assets of the IRA. That portion of the net income is includible in your gross income for the year. See Publication 590, Individual Retirement Arrangements (IRAs), for more information on contribution limits.

Q-33: Assuming the same facts as question 32, how will the financial institution that distributes my IRA contributions to me report this distribution?

A-33: The financial institution will report the entire amount of the distribution (distributed contributions and attributable net income) on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. However, it should report only the amount of any net income attributable to the distributed contributions as the "Taxable amount" on Form 1099-R.

Q-34: How might my combat pay exclusion affect my eligibility for the Earned Income Tax Credit (EITC)? A-34: A change in the tax law for 2002 and later years removes excluded combat pay, the Basic Allowance for Housing (BAH) and the Basic Allowance for Subsistence (BAS) from the definition of "earned income" for purposes of the EITC. (Previously, these items were counted in figuring earned income for this credit.) With this change, your income may fall within the qualifying range to claim the credit. But if the combat pay exclusion leaves you with no earned income, you will not be able to claim the EITC.

If you need additional information or have specific tax questions and concerns, you have already downloaded and read Publication 3 dealing with Military combat zones and cannot find the answers, and would like further assistance directly from the INTERNAL REVENUE SERVICE, then AND ONLY then, write to the IRS at. combatzone@irs.gov*