Taxes from the combat zone: should you file or not?

If you or your spouse served in a combat zone in 2009, you might not be required to file a tax return.  But you might want to do so anyway, to claim a valuable tax break that puts dollars in your pocket.

As you know, if you’re serving in a combat zone, your military pay might not be taxable and therefore you might not have to file a tax return.  However, you could still be eligible for the Earned Income Tax Credit.

What’s an earned income credit?

It’s a credit on your federal tax return that’s available to taxpayers who don’t earn a high income. It’s available for single folks with income under $13,440.  For families, it depends on the number of children.  A family with 3 children with income under $48,729 could be eligible for at least a partial credit.  For many military members, their wages fall into the earned income eligibility.

What’s a tax credit?

A credit reduces your taxes dollar for dollar, and part of this credit is available as a refund even if you have no tax.

How does nontaxable combat pay work?

For any month that you’re stationed in a combat zone as an enlisted member, warrant officer or commissioned warrant officer of the military, your earnings for that month are not taxable. For officers, the amount of their income not taxed is capped at the highest enlisted pay. If you have questions about the definition of a combat zone, check out IRS – Military Pay Exclusion – Combat Zone.

Can I still get that tax credit without my pay being taxed?

Yes. There’s a special law just for the military, that allows you to elect (choose) to have your combat pay (that’s not taxable) be considered “earned income” for earned income tax credit calculation only.

Should I elect that?

Probably. However you need to check if your refund increases with that election.  If your spouse has wages or self-employment income, adding your combat pay may reduce or cancel the credit. Once your family income is greater than $16,000 to $21,000, the credit starts to decrease. So be sure to check which choice gets you more money.

If you use TurboTax to prepare your return, we ask about that election when your W-2 shows that you have nontaxable combat pay (box 12, code Q).   If you say yes, be sure to verify that the refund in the refund monitor increased. If your refund is reduced, just go back and change the election to no.

For more information on the military and taxes:

IRS Questions & Answers on Combat Zone Tax Provisions

IRS Tax Information for Members of the Armed Forces

IRS Armed Forces Tax  Guide

I’m in the military. Do I need to file a state return?

Military Spouse Residency Relief Act and State Taxes