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From The Tax Adviser:
Tax Planning for Clients in the Military
pecial tax provisions apply to people serving in the U.S. armed forces. Given the U.S. military presence worldwide, CPAs for military personnel should be aware of these rules and know whether (and when) they apply.
Armed forces members include commissioned officers and enlisted personnel in all regular and reserve units under the jurisdiction of the secretaries of defense, army, navy and air force (including the coast guard).
Generally, compensation paid to members of the armed forces is taxable as income for federal tax purposes. This can include
Exclusions from income. For current armed forces members, former members and their dependents, gross income does not include qualified military benefits, which are any allowances or in-kind benefits (other than personal use of a government vehicle). These benefits encompass
COMBAT ZONE EXCLUSION
In addition to the regular exclusions, personnel serving in combat zones can exclude certain payments from income. A combat zone is any area designated by presidential executive order as one in which U.S. armed forces are engaging in (or have engaged in) combat.
Compensation paid to personnel and commissioned officers that can be excluded includes
In addition, service in a combat zone includes any periods an armed forces member is absent from duty due to sickness, wounds, leave or internment by the enemy or other lawful cause. Someone who becomes a prisoner of war or missing in action is deemed to continue in active service as long as he or she remains so classified.
Exclusion amount. For commissioned officers (other than warrant officers), the amount excluded is limited to the highest rate of basic pay at the highest pay grade applicable, plus any imminent danger or hostile fire pay received when the officer served in a combat zone.
For a discussion of the tax ramifications for compensation paid to clients who serve in the U.S. military, see Tax Planning for Armed Forces Personnel (Part I), by Larry Garrison, in the December 1999 issue of The Tax Adviser.
Nicholas Fiore, editor