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Savings opportunities for armed forces personnel.

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

  • Basic pay for active duty, attendance at a designated service school, back wages, drills, reserve training and training duty.
  • Special pay for aviation career incentives, diving duty, foreign duty (that is, outside the 48 contiguous states and the District of Columbia), hostile fire, imminent danger and special duty assignment pay.
  • Enlistment and reenlistment bonuses.
  • Pay for accrued leave on separation, mustering out and personal allowances to high-ranking officers.

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

  • Living allowances for basic housing or subsistence, housing and the cost of living abroad, or variable housing.
  • Family allowances for certain educational expenses for dependents, emergencies and evacuations to a safe place.
  • Death allowances for burial services, gratuity payments (up to $3,000) to eligible survivors and certain travel.
  • Moving allowances for dislocation, move-in housing, moving of household and personal items, moving of trailers or mobile homes, storage and temporary lodging.
  • Travel allowances for annual round trips for dependent students, leave between consecutive overseas tours, reassignment in a dependent-restricted status and transportation for personnel and dependents during ship overhaul or inactivation.
  • Other payments for disability, group-term life insurance, ROTC educational and subsistence allowances, survivor and retirement protection plan premiums, uniform allowances and uniforms furnished to enlisted personnel.
  • In-kind military benefits such as space-available travel on government aircraft, medical and dental care and commissary and exchange privileges.


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

  • Active duty pay in a combat zone.
  • Imminent danger or hostile fire pay.
  • Reenlistment bonuses.
  • Pay for accrued leave in a combat zone.
  • Pay for duty in clubs, messes, post and station theaters and other activities earned in a combat zone.

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
The Tax Adviser

©1999 AICPA


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