By The Tax Institute at H&R Block
Whether stationed in the continental United States or overseas, H&R Block has military trained tax professionals available to servicemembers on and around most installations in CONUS and around various installations OCONUS. Plus, with the development of the new face-to-face online technology, Block Live℠ (http://BlockLive.com), allows servicemembers to have their taxes prepared by an H&R Block Tax Professional in real time conveniently via video conference over the internet, from just about anywhere in the world. There are specific filing dates to file for those overseas, unless you are in a combat zone. Additionally, combat zone servicemembers may be eligible for combat pay tax exclusions.
If you are a member of the U.S. Armed Forces serving on active duty in a combat zone, certain types of your pay are not subject to income tax.
Who is considered to be “a member of the U.S. Armed Forces” for this exclusion?
You must be all of the following:
· A commissioned officer, warrant officer, or enlisted personnel;
· In a regular or reserve unit;
· Under control of the Secretary of the Defense, Army, Navy, Air Force, or Coast Guard.
What is considered a combat zone?
Combat zones are areas in which the U.S. Armed Forces are engaging or have engaged in combat. Currently, the following are designated combat zones for purposes of the tax benefits:
· Arabian Peninsula Areas. This includes 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. (beginning Jan. 17, 1991)
· Kosovo area. This includes the Federal Republic of Yugoslavia (Serbia and Montenegro), Albania, the Adriatic Sea and the Ionian Sea north of the 39th Parallel. (Beginning Mar. 24, 1999)
· Afghanistan. (Beginning Sept. 19, 2001)
· Three parts of the former Yugoslavia—Bosnia and Herzegovina, Croatia, and Macedonia—are treated as combat zones because they are designated “Qualified Hazardous Duty Areas.” (Nov. 21, 1995.)
· In support of Operation Enduring Freedom (Afghanistan combat zone):
o Pakistan, Tajikistan and Jordan - Sept. 19, 2001
o Incirlik Air Base, Turkey - Sept. 21, 2001 through Dec. 31, 2005
o Kyrgyzstan and Uzbekistan - Oct. 1, 2001
o Philippines (only troops with orders referencing Operation Enduring Freedom) - Jan. 9, 2002
o Yemen - Apr. 10, 2002
o Djibouti - July 1, 2002
o Israel - Jan. 1 through July 31, 2003
o Somalia - Jan. 1, 2004
· In support of Operation Iraqi Freedom (Arabian Peninsula Areas combat zone):
o Turkey - Jan. 1, 2003 through Dec. 31, 2005
o The Mediterranean Sea east of 30° East longitude - Mar. 19 through July 31, 2003
o Jordan - Mar. 19, 2003
o Egypt - Mar. 19 through Apr. 20, 2003
I meet those rules, so what part of my pay is tax-free?
The following types of pay are excluded, so they should not be included in box 1 of your Armed Forces W-2. If you disagree with the amount reported in box 1, contact your DFAS finance office.
· Active duty pay earned in any month you served in a combat zone.
· Imminent danger/hostile fire pay.
· A reenlistment bonus if the voluntary extension or reenlistment occurs in a month you served in a combat zone.
· Pay for accrued leave earned in any month you served in a combat zone. The Department of Defense must determine that the unused leave was earned during that period.
· Pay received for duties as a member of the Armed Forces in clubs, messes, post and station theaters, and other non-appropriated fund activities. The pay must be earned in a month you served in a combat zone.
· Awards for suggestions, inventions, or scientific achievements you are entitled to because of a submission made in a month you served in a combat zone.
· Student loan repayments. If the entire year of service was performed in a combat zone, the entire student loan payment is excluded. If only part of that year of service was performed in a combat zone, only part of the repayment is excluded.
How does the nontaxable combat pay affect other parts of my tax return?
· Earned Income Tax Credit (EITC). For tax years 2004 and later, you can elect to include your nontaxable combat pay in your earned income for purposes of the ETIC. However, you must elect to include it all in earned income or none—you cannot elect to include only part of it. Depending on the amount of your other income, it may or may not be advantageous to you to make the election. An H&R Block tax professional can help you determine whether the election will get you a lower tax liability, which may mean a bigger refund.
o For the tax pro: To make the election, enter the amount on Form 1040, line 64b. The amount of the nontaxable combat pay should be shown in Form(s) W-2, box 12, with code Q.
· Additional Child Tax Credit (ACTC). Since 2004, nontaxable combat pay has been automatically included in earned income for purposes of calculating this refundable credit. No election is necessary.
· Retirement Contributions. Your nontaxable combat pay still counts as compensation for determining how much you can contribute to an IRA.
Whether filing taxes at one of H&R Block’s various retail outlets CONUS and OCONUS or through Block Live℠, we have tax solutions available to help you meet the requirements of filing your taxes on time. Keep the information in the article in mind as you get ready to file tax return for 2011. Find us online at HRBlock.com.