18.2 Tax Provisions for Members of the Military: Combat Zone Exclusion, Excluded Allowances, Moving Expenses & Deadline Relief

Why This Topic Matters

The Taxation domain lists "Tax provisions for members of the military", and military facts appear throughout Part 1: nontaxable combat pay affects the EITC, absences for military service count as time living at home for dependency and filing status, and the deadlines for filing and for claiming refunds are suspended during combat service.

Combat Zone Exclusion (IRC §112)

Pay received for any month in which the member served in a combat zone (or a qualified hazardous duty area, or in direct support of combat operations) is excluded from gross income:

• Serving even one day in a combat zone during a month excludes pay for the entire month.
• Hospitalization for wounds, disease, or injury incurred in a combat zone extends the exclusion for up to two years after combat activities end.
• Excluded pay is not in Form W-2, Box 1; it is reported in Box 12, Code Q.
• Nontaxable combat pay election: For the EITC, a member may elect to include nontaxable combat pay in earned income if doing so increases the credit. Spouses each make their own election. (Combat pay also counts as compensation for IRA contributions even though it is not taxable.)

Military Allowances and Benefits That Are Excluded

Because BAH is excluded, a member who owns a home can still deduct mortgage interest and real estate taxes if itemizing.

Moving Expenses for a Permanent Change of Station (IRC §217(g))

Moving expenses remain deductible only for active-duty members of the Armed Forces (and their spouses and dependents) who move under a military order incident to a permanent change of station (PCS). Civilians cannot deduct moving expenses (the suspension is permanent under OBBBA).

• Deductible: Reasonable unreimbursed costs of moving household goods and personal effects (including storage) and of traveling to the new home, including lodging but not meals.
• Reporting: Form 3903; the deduction is an above-the-line adjustment on Schedule 1, Line 14.
• Reimbursements: Amounts the government pays directly or reimburses for a PCS are excluded from income (IRC §132(g)); only unreimbursed expenses are deducted, and a reimbursement exceeding expenses is taxable.

Reservists' Travel (IRC §62(a)(2)(E))

A member of a reserve component (such as the National Guard or Army Reserve) who travels more than 100 miles from home and stays overnight to attend drills or meetings may deduct unreimbursed travel expenses (lodging, 50% of meals, and transportation at the standard mileage rate, limited to the federal per diem rate) above the line on Schedule 1, Line 12, using Form 2106. Expenses for shorter trips are nondeductible employee expenses.

Deadline and Collection Relief (IRC §7508)

For a member serving in a combat zone (or a contingency operation outside the U.S.), the time to file returns, pay tax, file refund claims, and take other actions is extended by:

$\text{Extension} = \text{Time in the combat zone} + 180 \text{ days} + \text{days left in the filing period when the member entered}$

No penalties or interest accrue during the extension, and the IRS suspends examinations and collection. The relief also applies to the member's spouse for a jointly filed return. Members outside the U.S. on regular duty (not a combat zone) receive the automatic 2-month extension to June 15 available to all taxpayers abroad.

Other Military Rules on the Return

• Signing a joint return: If one spouse is in a combat zone, the other spouse may sign the joint return for both with a written explanation, without a power of attorney.
• Dependency and filing status: Time a member spends away on military service counts as temporary absence, so the member's home remains the child's or spouse's principal place of abode.
• Home sale exclusion (IRC §121(d)(9)): A member on qualified official extended duty (more than 90 days, at a duty station at least 50 miles from the home or in government quarters) may elect to suspend the 5-year test period for up to 10 years, so a home last lived in as a residence long ago can still qualify for the $250,000/$500,000 exclusion.
• Death in a combat zone (IRC §692): Income tax is forgiven for the year of death and for any earlier year ending on or after the first day of combat zone service.
• Residency: Under the Servicemembers Civil Relief Act, military pay is taxed by the member's state of legal residence, not the state of the duty station (a state tax rule, but often tested with federal facts).
• Qualified reservist distributions from retirement plans avoid the 10% additional tax (see early distribution exceptions).

Example: Sgt. Maria Lopez, an enlisted member, served in a designated combat zone from March 20 through October 5, 2025. Her pay for March through October (8 months) is fully excluded, because serving any part of a month qualifies the whole month. Her taxable Box 1 wages include only January, February, November, and December. She may elect to include the excluded pay in earned income for the EITC. Her deadline to file her 2025 return is extended until 180 days after she left the zone plus the days that remained in the filing period when she entered.