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Article added or updated:
03/30/2008 |
2006 Combat Zone Tax Provisions for the U.S. Military
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| Added:2/01/06
Combat Zones
Q-1: What geographic areas are considered combat zones?
A-1: Combat zones are designated by an Executive Order from the
President as areas in which the U.S. Armed Forces are engaging or have
engaged in combat. There are currently three such combat zones
(including the airspace above each): (Continued below)
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*
Arabian Peninsula Areas, beginning Jan. 17, 1991 -- 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.
*
Kosovo area, beginning Mar. 24, 1999 -- Federal Republic of Yugoslavia
(Serbia and Montenegro), Albania, the Adriatic Sea and the Ionian Sea
north of the 39th Parallel.
*
Afghanistan, beginning Sept. 19, 2001.
Public Law 104-117 designates three parts of the former Yugoslavia as a
Qualified Hazardous Duty Area, to be treated as if it were a combat
zone, beginning Nov. 21, 1995 -- Bosnia and Herzegovina, Croatia, and
Macedonia.
In addition, the Department of Defense has certified these locations for
combat zone tax benefits due to their direct support of military
operations, beginning on the listed dates:
In support of Operation Enduring Freedom (Afghanistan combat zone):
*
Pakistan, Tajikistan and Jordan - Sept. 19, 2001
*
Incirlik Air Base, Turkey - Sept. 21, 2001 through Dec. 31, 2005
*
Kyrgyzstan and Uzbekistan - Oct. 1, 2001
*
Philippines (only troops with orders referencing Operation Enduring
Freedom) - Jan. 9, 2002
*
Yemen - Apr. 10, 2002
*
Djibouti - July 1, 2002
In support of Operation Iraqi Freedom (Arabian Peninsula Areas combat
zone):
*
Turkey - Jan. 1, 2003 through Dec. 31, 2005
*
Israel - Jan. 1 through July 31, 2003
*
the Mediterranean Sea east of 30° East longitude - Mar. 19 through July
31, 2003
*
Jordan - Mar. 19, 2003
*
Egypt - Mar. 19 through Apr. 20, 2003
Military Pay Exclusion - Combat Zone Service
Q-2: I am a member of the U.S. Armed Forces performing services in a
combat zone. Is any part of my military pay for serving in this area
excluded from gross income?
A-2: Yes, if you serve in a combat zone as an enlisted person or as a
warrant officer (including commissioned warrant officers) for any part
of a month, all your military pay received for military service that
month is excluded from gross income. For commissioned officers, the
monthly exclusion is capped at the highest enlisted pay, plus any
hostile fire or imminent danger pay received.
For 2002, the most an officer could earn tax-free each month was
$5,532.90 ($5,382.90, the highest monthly enlisted pay, plus $150
hostile fire or imminent danger pay). The Emergency Wartime Supplemental
Appropriations Act of 2003 (P.L. 108-11) raised the imminent danger pay
to $225 per month through September 2003. The 2004 National Defense
Authorization Act extended this higher rate through December 2004. For
2003, the monthly combat pay exclusion for officers totals $5,957.70.
For 2004, it totals $6,315.90. Amounts excluded from gross income are
not subject to federal income tax.
Q-3: My husband and I are both enlisted personnel serving in the U.S.
Armed Forces in the combat zone. Are we each entitled to the income tax
exclusion for military pay?
A-3: Yes, each of you qualifies for the income tax exclusion for your
respective military pay.
Q-4: I am a member of the U.S. Armed Forces stationed on a ship outside
any combat zone. I fly missions over a combat zone as part of the
military operations in that combat zone. Is any part of my military pay
excluded from gross income?
A-4: Yes. The combat zone includes the airspace over it, so you are
serving in the combat zone. See Q&A-2 above for a discussion of the
amount of your military pay that is excluded.
Q-5: If I am injured and hospitalized while serving in the U.S. Armed
Forces in a combat zone, is any of my military pay excluded from gross
income?
A-5: Yes. Military pay received by enlisted personnel who are
hospitalized as a result of injuries sustained while serving in a combat
zone is excluded from gross income for the period of hospitalization,
subject to the 2-year limitation provided below. Commissioned officers
have a similar exclusion, limited to the maximum enlisted pay amount per
month. (See Q&A-2 above.) These exclusions from gross income for
hospitalized enlisted personnel and commissioned officers end 2 years
after the date of termination of the combat zone.
Q-6: My wife is currently serving in the U.S. Armed Forces in a combat
zone and will be eligible for discharge when she returns home. If she is
discharged upon her return, will the payment for the annual leave that
she accrued during her service in the combat zone be excluded from gross
income?
A-6: Yes. Annual leave payments to enlisted members of the U.S. Armed
Forces upon discharge from service are excluded from gross income to the
extent the annual leave was accrued during any month in any part of
which the member served in a combat zone. If your wife is a commissioned
officer, a portion of the annual leave payment she receives for leave
accrued during any month in any part of which she served in a combat
zone may be excluded. The annual leave payment is not excludable to the
extent it exceeds the maximum enlisted pay amount (see Q&A-2 above) for
the month of service to which it relates less the amount of military pay
already excluded for that month.
Q-7: I am an enlisted person serving in a combat zone. If I reenlist
early while I am in the combat zone and receive my reenlistment bonus
several months later when I am stationed outside the combat zone, is any
part of my reenlistment bonus excluded from gross income?
A-7: Yes. The reenlistment bonus is excluded from gross income although
received in a month that you were outside the combat zone, because you
completed the necessary action for entitlement to the reenlistment bonus
in a month during which you served in the combat zone.
Q-8: My brother, who is a civilian in the merchant marine, is on a ship
that transports military supplies between the United States and the
combat zone. Is he entitled to the combat zone military pay exclusion?
A-8: No. Those serving in the merchant marine are not members of the
U.S. Armed Forces. The combat zone military pay exclusion applies only
to members of the U.S. Armed Forces. Neither federal civilian employees
nor civilian defense contractors deployed with U.S. forces qualify for
an exclusion of income earned while working in a combat zone or
qualified hazardous duty area. They may, however, qualify for an
extension of deadlines to file and pay taxes.
The U.S. Armed Forces include all regular and reserve components of the
uniformed services that are under the control of the Secretaries of
Defense, Army, Navy, and Air Force, and the Secretary of Homeland
Security with respect to the Coast Guard.
Q-9: My husband is a member of the U.S. Armed Forces performing services
related to a combat operation but he is not in the combat zone and he is
not receiving hostile fire/imminent danger pay. Is he entitled to the
military pay exclusion?
A-9: No. U.S. Armed Forces personnel serving outside the combat zone are
not entitled to the military pay exclusion unless they are serving in
direct support of military operations in the combat zone for which they
receive hostile fire/imminent danger pay. The Department of Defense
certifies areas that meet these requirements.
Q-10: How do I certify my entitlement to the military pay exclusion?
A-10: Your service branch must certify your entitlement on the Form W-2
it provides you. If you believe you are entitled to the exclusion, but
it is not reflected on your Form W-2, ask your service branch to issue a
corrected Form W-2.
For more details on the exclusion of military pay,
see Publication 3, Armed Forces' Tax Guide ( PDF 166K).
Extension of Deadlines - Combat Zone Service
Q-11: I have been serving in a combat zone since last November. I
understand that the deadline for performing certain actions required by
the tax laws is extended as a result of my service. When did these
deadline extensions begin for me?
A-11: The deadline extension provisions apply to most tax actions
required to be performed on or after the beginning date for your combat
zone, or the date you began serving in that combat zone, whichever is
later. In your case, the deadline extensions began the day you started
serving in the combat zone last November.
Q-12: My son is a member of the U.S. Armed Forces who has been serving
in a combat zone since March 1. Is he entitled to an extension of time
for filing and paying his federal income taxes? Are any assessment or
collection deadlines extended?
A-12: For both questions, the answer is yes. In general, the deadlines
for performing certain actions applicable to his taxes are extended for
the period of his service in the combat zone, plus 180 days after his
last day in the combat zone. This extension applies to the filing and
paying of your son's income taxes that would have been due April 15. In
addition to the 180 days, his extension period will include the 46 days
that were left before the April 15th deadline when he entered the combat
zone. During his 226-day extension period, assessment and collection
deadlines will be extended, and he will not be charged interest or
penalties attributable to the extension period.
Q-13: Assuming the same facts as in question 12, does the extension for
filing and paying his individual income taxes apply to unearned income
from my son’s investments?
A-13: Yes. The extensions apply without regard to the source of your
son's income.
Q-14: Assuming the same facts as in question 12, will the deadline
extension provisions continue to apply if my son is hospitalized as a
result of an injury sustained in the combat zone?
A-14: Yes. The deadline extension provisions will apply for the period
that your son is continuously hospitalized outside of the United States
as a result of injuries sustained while serving in a combat zone,
including 180 days thereafter. For hospitalization inside the United
States, the extension period cannot be more than 5 years.
Q-15: My son is a member of a unit of the U.S. Armed Forces and most
members of the unit have been serving in a combat zone since April 1. My
son has been overseas since February 1, but he did not enter the combat
zone until May 1. Is he entitled to an extension of time for filing and
paying his federal income taxes that were due April 15?
A-15: No. The extension applies only to a deadline arising on or after
the date your son entered the combat zone on May 1.
Q-16: Do the deadline extension provisions apply only to members of the
U.S. Armed Forces serving in the combat zone?
A-16: No. Unlike the combat zone military pay exclusion, the deadline
extensions also apply to individuals serving in the combat zone in
support of the U.S. Armed Forces, such as merchant marines serving
aboard vessels under the operational control of the Department of
Defense, Red Cross personnel, accredited correspondents, and civilian
personnel acting under the direction of the U.S. Armed Forces in support
of those forces.
Q-17: Do the deadline extensions apply only to those within a combat
zone?
A-17: No. Members of the U.S. Armed Forces who perform military service
in an area outside a combat zone qualify for the suspension of time
provisions if their service is in direct support of military operations
in the combat zone, and they receive special pay for duty subject to
hostile fire or imminent danger as certified by the Department of
Defense. Q&A-1 lists various combat zones and the support areas
certified by the Department of Defense. The Military Family Tax Relief
Act of 2003 further applied the deadline extension provisions to those
serving in a Contingency Operation, as designated by the Secretary of
Defense.
Q-18: My son is a civilian explosive specialist who is in a combat zone
training U.S. Armed Forces personnel serving in a combat zone. Do the
deadline extension provisions apply to my son?
A-18: Yes. The deadline extension provisions apply to your son because
he is serving in a combat zone in support of the U.S. Armed Forces.
Q-19: My husband is a private businessman working in a combat zone on
nonmilitary projects. Do the deadline extension provisions apply to my
husband?
A-19: No. Other than military personnel, the only individuals working in
a combat zone that are entitled to the deadline extension provisions are
those serving in support of the U.S. Armed Forces.
Q-20: I am a member of the U.S. Armed Forces serving in a combat zone.
Do the deadline extension provisions apply to my husband who is in the
United States?
A-20: Yes. The deadline extension provisions apply not only to members
serving in the U.S. Armed Forces (or individuals serving in support
thereof) in the combat zone, but to their spouses as well, with two
exceptions. First, if you are hospitalized in the United States as a
result of injuries received while serving in a combat zone, the deadline
extension provisions would not apply to your husband. Second, the
deadline extension provisions for your husband do not apply for any tax
year beginning more than 2 years after the date of the termination of
the combat zone designation.
Q-21: Assuming the same facts as in question 20, will my husband have to
file a joint tax return in order to benefit from the deadline extension
provisions?
A-21: No. The deadline extension provisions apply to both spouses
whether joint or separate returns are filed. If your husband chooses to
file a separate return, he will have the same extension of time to file
and pay his taxes that you have.
Q-22: My husband is serving in the U.S. Armed Forces in a combat zone.
Last year, our son, who is 12 years old, received interest income on
which he owes tax because the amount exceeded his standard deduction.
Our daughter, who is 17 years old, received both investment income and
earned income from a part-time job. She is entitled to a refund of part
of the tax withheld from her pay. We claim both children as dependents
on our federal individual income tax return. Must I file individual
income tax returns for our children while my husband is in the combat
zone?
A-22: No. Filing individual income tax returns for your dependent
children is not required while your husband is in the combat zone.
Instead, these returns will be timely if filed on or before the deadline
for filing your joint income tax return under the applicable deadline
extensions. When filing your children’s individual income tax returns,
put "COMBAT ZONE" in red at the top of those returns. Because your older
child is entitled to a refund, she may want to file her income tax
return and obtain her refund without regard to the extension.
Q-23: I am a member of the U.S. Armed Forces serving in a combat zone.
My spouse and our three children live in our home in the United States.
During the year, a child care provider took care of our children in our
home. We are required to file a Schedule H, Household Employment Taxes,
as an attachment to our joint income tax return to report the employment
taxes on wages we paid to our child care provider. Does the deadline
extension apply to the filing of Schedule H as an attachment to our
income tax return?
A-23: Yes. The deadline extension applies to all schedules and forms
that are filed as attachments to an income tax return.
Q-24: Almost two years ago, the IRS contacted me to collect tax on a
joint income tax return I had filed with my now former spouse. I believe
only my former spouse should be held liable for the tax. I understand
that I may file Form 8857, Request for Innocent Spouse Relief, within 2
years of the first collection activity against me by the IRS. I have
just entered a combat zone. Do the deadline extensions apply to the
filing of Form 8857?
A-24: Yes. In addition to deadlines for filing and paying taxes, there
are various time-sensitive acts for which performance may be postponed
because of combat zone service. The 2-year period after the first
collection activity for requesting innocent spouse relief is one of
these. Other examples are the 90-day limit for filing a Tax Court
petition, the 30-day limit for requesting a Collection Due Process
hearing, the 60-day period for rolling over a distribution from a
qualified tuition plan or Coverdell Education Savings Account into
another such plan or ESA, respectively, and the annual distribution from
a retirement plan of substantially equal amounts to avoid an excise tax
for premature distributions.
Q-25: I served in the U.S. Armed Forces in Afghanistan from April 1,
2002, until August 31, 2002. I was reassigned to the Arabian Peninsula
Areas on March 5, 2003. I understand that I was entitled to an extension
of time for filing and paying my 2001 income taxes of 195 days (180 days
plus the 15-day period that was left before the April 15, 2002
deadline). This extension period would have expired on March 14, 2003 --
195 days from September 1, 2002 (my first day out of the combat zone in
Afghanistan). What effect does my reentry into a combat zone have on my
extension for filing and paying my 2001 income taxes?
A-25: Because the extension period had not expired for your 2001
individual income tax return before you reentered a combat zone, a new
180-day period will begin after you leave a combat zone for the second
time. In addition, any time that remained in the 15-day period when you
entered the Arabian Peninsula Areas adds to the new 180-day period when
you leave the Arabian Peninsula Areas. In determining how much of the
15-day period is unused, treat the 180-day period as being used first.
In your case, on March 5, 2003, 10 of the 15 days remained. After you
leave the Arabian Peninsula Areas, you will have a 190-day extension
period for filing and paying your 2001 income taxes. You will have a
222-day period (180 days plus the 42 days that remained before April 15,
2003) to file and pay your 2002 taxes.
Q-26: My wife is a member of the U.S. Armed Forces serving in a combat
zone. Can she make a timely qualified retirement contribution for last
year to her individual retirement account (IRA) after April 15 this year
but on or before the due date of her individual income tax return after
applying the deadline extension provisions?
A-26: Yes. Your wife can make a timely qualified retirement contribution
for the year to her IRA on or before the extended deadline for filing
her income tax return for that year under the extension provisions.
Q-27: My brother, who began serving in the U.S. Armed Forces in a combat
zone in early January, did not make his fourth estimated tax payment for
the year, due January 15. Will he be liable for estimated tax penalties?
A-27: No. Your brother is covered by the deadline extension rules and
will not be liable for any penalties if he files and pays any tax due by
his extended filing due date. When your brother files his income tax
return, he should put "COMBAT ZONE" in red at the top of that return.
Q-28: My son, who is a member of the U.S. Armed Forces, was on an
installment payment plan with the IRS for back income taxes before he
was assigned to a combat zone. What should be done now that he is in the
combat zone?
A-28: The IRS office where your son was making payments should be
contacted. Because your son is serving in a combat zone, he will not
have to make payments on his past due taxes for his period of service in
the combat zone plus 180 days. No additional penalties or interest will
be charged during this deadline extension period.
Q-29: My son, who is a member of the U.S. Armed Forces serving in a
combat zone, will file his individual income tax return for last year
after the regular April 15 due date, but on or before the end of the
deadline extension for filing that return. He expects to receive a
refund. Will the IRS pay interest on the refund?
A-29: Yes. The IRS will pay interest from the April 15 due date on a
refund issued to your son if he files his individual income tax return
on or before the due date of that return after applying the deadline
extension provisions. When your son files, he should put "COMBAT ZONE"
in red at the top of that return. If his return is not timely filed on
or before the extended due date, no interest will be paid on the refund
except as provided under the normal refund rules. Even though the
deadline is extended, your son may file a return earlier to receive any
refund due.
Q-30: Do the deadline extension provisions apply to tax returns other
than the individual income tax return?
A-30: Yes. The deadline extension provisions also apply to estate and
gift tax returns. However, the deadline extension provisions do not
apply to other tax and information returns, such as those for corporate
income taxes, employment taxes, or excise taxes.
Q-31: My husband and I are civilian employees of defense contractors. I
work in the United States and my husband temporarily works in Germany.
Our jobs involve the production of equipment used by the U.S. Armed
Forces for a combat zone operation. Do the deadline extension provisions
apply to either of us?
A-31: No. The deadline extension provisions do not apply to civilian
employees of defense contractors unless they are serving in a combat
zone in support of the U.S. Armed Forces.
For more details on deadline extensions related to military service,see
Publication 3, Armed Forces' Tax Guide ( PDF 166K).
Miscellaneous Provisions - Combat Zone Service
Q-32: My daughter is a member of the U.S. Armed Forces serving in a
combat zone. She makes calls to me here in the United States. Are these
calls exempt from the federal excise tax on toll telephone service?
A-32: Yes. Telephone calls that originate within a combat zone and that
are made by members of the U.S. Armed Forces serving there are exempt
from the federal excise tax on toll telephone service, provided a
properly executed certificate of exemption is furnished to the telephone
service provider receiving payment for the call. The exemption
certificate should be in substantially the following form:
EXEMPTION CERTIFICATE
(Overseas Telephone Calls)
(Date)..........20...
I certify that the toll charges of $.......... are for telephone or
radio telephone messages originating at..............(Point of origin)
within a combat zone from..............(Name) a member of the Armed
Forces of the United States performing service in such combat zone; that
the transmission facilities were furnished by ......(Name of carrier);
and that the charges are exempt from tax under section 4253(d) of the
Internal Revenue Code.
………………………..........
(Signature of Subscriber)
………...............................
(Address)
Note: Penalty for fraudulent use: fine or imprisonment or both.
Q-33: If I've already paid the federal excise tax on the toll telephone
service described in Q&A-32, can I obtain a refund?
A-33: Yes. If you've already paid an excise tax on that toll telephone
service, you may obtain a refund either from the telephone service
provider that collected the excise tax, or from the IRS by filing Form
8849, Claim for Refund of Excise Taxes, with its Schedule 6.
Q-34: How will my military pay for active service in the U.S. Armed
Forces in a combat zone appear on my Form W-2, Wage and Tax Statement?
A-34: Military pay attributable to your active service in the combat
zone that is excluded from gross income will not appear on your Form W-2
in the box marked "Wages, tips, other compensation." However, military
pay for such service is subject to social security and medicare taxes
and will appear on your Form W-2 in the boxes marked "Social security
wages" and "Medicare wages and tips." If you believe you are entitled to
the military pay exclusion, but it is not reflected on your W-2, ask
your service branch to issue a corrected Form W-2.
Q-35: I'm an officer who served in one combat zone from January until
October last year, then went to another combat zone for the remainder of
the year. I made monthly contributions to an individual retirement
account (IRA) for the year. In view of the military pay exclusion for my
service in the combat zone, I may have little or no taxable compensation
and may not be eligible to make an IRA contribution for last year. If my
taxable compensation is less than the amount I put into my IRA, should I
withdraw the portion of my contributions that exceeds my taxable
compensation?
A-35: Yes. In general, any amount contributed to your IRA that is more
than the smaller of (1) your taxable compensation or (2) $3,000 ($3,500
if you are age 50 or over), is an excess contribution and must be
withdrawn to avoid a 6 percent excise tax. If you are married and file a
joint income tax return, you may still be eligible to make an IRA
contribution based on your spouse's taxable income. If this is not the
case, once you are sure that your taxable compensation will be less than
$3,000 ($3,500 if you are age 50 or over), you should withdraw the
portion of your contributions that exceeds your taxable compensation.
You will not be taxed on the distributed amount if you receive the
distribution on or before the deadline for filing your individual income
tax return after applying the deadline extension provisions. You may not
take a deduction with respect to these distributed contributions. You
must also withdraw the amount of net income attributable to the
distributed contributions while they were assets of the IRA. That
portion of the net income is includible in your gross income for the
year. For further information, see Publication 590, Individual
Retirement Arrangements (IRAs).
Q-36: Assuming the same facts as in question 35, how will the financial
institution that distributes my IRA contributions to me report this
distribution?
A-36: The financial institution will report the entire amount of the
distribution (distributed contributions and attributable net income) on
Form 1099-R, Distributions From Pensions, Annuities, Retirement or
Profit-Sharing Plans, IRAs, Insurance Contracts, etc. However, it should
report only the amount of any net income attributable to the distributed
contributions as the "Taxable amount" on Form 1099-R.
Q-37: How might my combat zone military pay exclusion affect my
eligibility for the Earned Income Tax Credit (EITC)?
A-37: A change in the tax law for 2002 and later years removes from the
definition of "earned income" for purposes of the EITC all employee
compensation that is not includible in gross income. Thus, for example,
excludable combat zone compensation, the Basic Allowance for Housing
(BAH) and the Basic Allowance for Subsistence (BAS) no longer count as
earned income for EITC purposes. With this change, your income may fall
within the qualifying range to claim the credit. But if the exclusion
leaves you with no earned income, you would not be able to claim the
EITC.
The Working Families Tax Relief Act of 2004 gives you the option of
treating excludable combat pay (but not BAH or BAS) as earned income for
purposes of figuring the EITC. This could help you avoid a situation in
which the military pay exclusion left you with no earned income and thus
no credit. Under this option, you include either all or none of your
combat pay when figuring the EITC – you cannot choose to count only a
part of it. This option applies for Tax Years 2004 and 2005 only.
This Act also provides that excludable combat pay (but not BAH or BAS)
is treated as taxable earned income when figuring the Child Tax Credit,
for years after 2003. Treatment of combat pay as earned income when
figuring this credit or the EITC does not change its exclusion from
taxable income.
For more details on tax issues related to military service, see
Publication 3, Armed Forces' Tax Guide ( PDF 166K).
Employers with Employees in a Combat Zone
Military Differential Pay
Q-38: What is military differential pay?
A-38: Differential pay is defined as payments made voluntarily by an
employer to represent the difference between the regular salary of an
employee called to military active duty and the amount being paid by the
military, if the regular salary was higher. For purposes of the
following questions and answers, the term differential pay also includes
military continuation pay, active duty differential payments required by
state statutes or payments made by certain states or commonwealths that
pay a stipend or a set dollar amount to their employees called to
military active duty.
Q-39: If an employer pays military differential pay to an employee
called to active duty, are these payments considered wages?
A-39: For federal tax purposes, the employment relationship between the
employee and the company was terminated when the worker was called for
active military service with the U.S. government or for active service
with the state National Guard. Under the circumstances, the payments
made by the company to the former employees while they are in military
service with the U.S. government or active service with the state
National Guard are not "wages" for services performed in "employment"
for the companies. These payments, therefore, are not "wages" subject to
the taxes imposed by the Federal Insurance Contributions Act and the
Federal Unemployment Tax Act or to the Collection of Income Tax at
Source on Wages.
* Reference: IRS Revenue Ruling 69-136
Q-40: What is the tax treatment of military differential pay?
A-40: Certain compensation received for active service in a combat zone
by members of the Armed Forces of the United States is excludable from
gross income. However, this exclusion applies only to compensation paid
by the Armed Forces of the United States to members of the Armed Forces.
Compensation paid by other employers (whether private enterprises or
governmental entities) to members of the Armed Forces cannot be excluded
as combat zone compensation even if the recipient is performing active
military service in a combat zone at the time the payment is made. See
Military Pay Exclusion — Combat Zone Service for more information on the
taxability of combat zone compensation.
Q-41: If an employee is called to active duty and receives military
differential pay, how are these payments reported by the employer to the
employee?
A-41: Employers should report military differential pay on Form
1099-MISC, Box 3: Other Income. Do not use Form W-2 for these payments.
Employers should not withhold FICA or income tax from these payments and
the payments are not subject to FUTA taxes.
Q-42: How does a person who receives military differential pay report
this on the federal income tax return?
A-42: The recipient reports the Form 1099-MISC amount on Line 21 of Form
1040 (Other Income) and lists the type as Military Differential Pay. No
self-employment tax is due because the income from these payments is not
derived from any trade or business conducted by the taxpayer for
self-employment tax purposes.
Q-43: Since these payments are considered income but not “wages” subject
to withholding, what should persons receiving these payments do to avoid
owing large amounts of tax when they file their returns?
A-43: Since the employer is not required to withhold income tax, the
recipient should prepare for the tax liability by making quarterly
estimated tax payments.
One option is for the taxpayer to sign up for the Electronic Federal Tax
Payment System (EFTPS), which enables the person to schedule payments
directly from a bank account for up to a year in advance. This is a
preferred method, since it is easiest for both the taxpayer and the
government and ensures prompt and accurate crediting of payments to the
taxpayer's account. Other options are to make credit card payments or
send checks with Form 1040-ES vouchers. Get more information on
electronic payment methods or see IRS Publication 505, Tax Withholding
and Estimated Tax (PDF 402K).
Social Security Taxes (FICA)
Q-44: Are there any benefit reductions due to FICA not being withheld by
the employer?
A-44: Military personnel have FICA taken out of their military pay even
when serving in a combat zone. Thus, they will get Social Security
credit for their military earnings. However, Social Security retirement
benefits are based on a worker’s total earnings history. Since the
military differential pay is not subject to FICA, the person’s Social
Security retirement benefits may be reduced.
Q-45: How does an employer correct the Form 941 (Quarterly Employment
Tax Return) if FICA and income taxes have been erroneously withheld?
A-45: Generally, you can correct errors on Forms 941 for prior quarters
by making an adjustment on your Form 941 for the quarter during which
the error is discovered. The adjustment increases or decreases your tax
liability for the quarter in which it is reported and is interest-free.
You must provide background information and certifications supporting
prior quarter adjustments. You do this by filing a Form 941C, Supporting
Statement to Correct Information, with your current quarter. Do not file
Form 941C separately. The IRS will not be able to process your
adjustments on Form 941 without this supporting information.
If excess FICA was paid in a prior period, you can also recover the
excess amount by filing a refund claim using Form 843. You must file
Form 941C, or equivalent statement, with Form 843. See the separate
instructions for Form 843.
Related Items:
*
Form 843, Claim for Refund and Request for Abatement (PDF 46K)
*
Instructions for Form 843 ( PDF 26K)
*
Form 941C, Supporting Statement To Correct Information ( PDF 85K)
Q-46: How does an employee recover FICA taxes that were erroneously
withheld by the employer?
A-46: Employees are encouraged to contact their employers and request
that they seek a refund of the erroneously withheld FICA on the
employees' behalf. Because employers also pay a portion of FICA that is
not withheld from payments to the employee, the employer will also be
entitled to a refund. The employer may have other similarly situated
employees who are entitled to refunds and the IRS can process a single
refund claim filed by the employer more efficiently than it can process
numerous refund claims filed by individual employees. If the employer
refuses to seek a refund on the employee's behalf, the employee may file
a refund claim using Form 843. Line 5 is where the employee explains the
reaseon for the refund and efforts made to secure it. The employee's
claim for refund must include a statement from the employer indicating
whether the employer has reimbursed any of the erroneously withheld FICA
to the employee or filed a refund claim for any of the erroneously
withheld FICA.
Other Benefits
Q-47: What is the tax treatment of health care benefits and coverage
while the employee is on active military duty?
A-47: Generally, the gross income of an employee does not include
employer-provided coverage under an accident or health plan or employer
contributions to such plans. This exclusion from gross income extends to
employees who are on military leave. The value of employer-provided
coverage, or employer contributions to accident or health plans, are not
reported on the Form 1099-MISC given to the employee.
Q-48: Is the cost of group term life insurance included in gross income
while the employee is on military pay?
A-48: The tax treatment of group term life insurance coverage provided
to employees on military leave is the same as coverage provided to
current employees. Generally, the cost of $50,000 of group term life insurance coverage is not included in gross income while the employee is
on military leave.
Q-49: If an employer pays an employee who is called to active duty his
vacation pay is this pay subject to social security, Medicare and income
taxes?
A-49: Yes, vacation pay that is earned or accrued prior to the worker
being called for active duty or active service is subject to withholding
as if it were a regular wage payment, even if paid to the worker after
activation. When vacation pay is in addition to regular wages for the
vacation period, treat it as a supplemental wage payment. If the
vacation pay is for a time longer than your usual payroll period, spread
it over the pay periods for which you pay it. Vacation pay that is
earned or accrues after the employment relationship is terminated by
activation is not a wage payment.
Q-50: If a co-worker wants to donate vacation time to an employee who is
called to active duty to whom is such leave taxable?
A-50: The donated vacation time is taxable to the recipient of the
vacation time. As a result, the employee on active duty receiving
donated vacation pay is subject to withholding of social security,
Medicare and income taxes as if it were a regular wage payment. When
vacation pay is in addition to regular wages for the vacation period,
treat it as a supplemental wage payment. If the vacation pay is for a
time longer than your usual payroll period, spread it over the pay
periods for which you pay it.
Q-51: An employee received an award from the employer and wishes to
donate it to a co-worker who has been called to active duty. To whom is
the award taxable?
A-51: The award is taxable to the recipient. The recipient’s award is
subject to withholding of social security, Medicare and income taxes as
if it were a regular wage payment. When an award is in addition to
regular wages, treat it as a supplemental wage payment.
* Reference for questions 44-51: Publication 15, Employer’s Tax Guide
(PDF 344K)
For more details on tax issues related to military service,see
Publication 3, Armed Forces' Tax Guide ( PDF 166K).
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