How Does Combat Zone Tax Exclusion Work

Once you leave the combat zone your base pay and other specialtybonus pays will revert to taxable and youll start building up a taxable LES balance for your W-2.

How does combat zone tax exclusion work. When youre out of the combat zone and receiving taxable pay again then youd continue making contributions to the traditional TSP and that does give you a tax deferral. You can find the complete list of current CZTEs here. What Is the Combat Zone Exclusion. Option 1 Service in an active combat area as designated by Executive Order and.

However those contributions in the combat zone are already tax-free so theres no tax deferral. Its one of many tax-related benefits the IRS extends to military members. Earnings received while in the combat zone are excluded from taxable income. Tax Free Combat Pay Produces Tax Free Earnings As you probably know income earned in a combat zone or a portion thereof is excluded from income for income tax purposes.

According to the Armed Forces Tax Guide you are eligible for this tax exclusion if you work in one of the following conditions. The new law went into effect in 2018. For enlisted service members the amount of the exclusion from federal income tax is unlimited. Combat Zone Tax Exclusions CZTE Being assigned to or working in a combat zone triggers another tax advantage.

For 2018 that dollar amount limit is 103900. The new law removes the abode requirement by providing that a contractor who supports the US. The Combat Zone Tax Exclusion or CZTE dates back to World War I when taxes were increased to pay for the war effort and the government decided that members of the armed forces should be exempt from the increase. Liberty Tax Service.

CZTEs are areas that POTUS designates by Executive Order as an area in which the US Armed Forces are engaging in combat. I always check the IRS website for the most current list. If you serve in a combat zone for at least one day during a month you get the combat zone exclusion for the whole month. To qualify employees must be serving in a designated.

This is for service members who serve in an active combat zone for any time during a month. So in this case if youre contributing to a traditional TSP being in a CZTE situation if youre there all year may throw a spanner into the works. When your tax-free pay goes to the conventional TSP its already not taxed so it doesnt reduce your taxable income or your tax bill. CZTE stands for Combat Zone Tax Exclusion.

Combat pay tax exclusion Although any base pay earned by a member of the armed services while serving in a combat zone is excluded from federal income tax it is still subject to Social Security tax and Medicare tax. Definition of Combat Zone A combat zone is any area the President. Your W-2 will show your take-home pay but it doesnt show as taxable income. This is a significant development for contractors supporting the military overseas.

The foreign earned income exclusion is not available to federal employees or members of the military. Basically if it occurs in a designated combat zone its tax-free. Under the exclusion taxpayers can choose to exclude their foreign earned income up to a certain dollar amount. If you work in a combat zone you can exclude a hefty portion of your salary or compensation either through the Combat Zone Exclusion or through the Foreign Earned Income Exclusion.

Armed Forces in a combat zone is entitled to the foreign earned income exclusion even if his abode is in the US. However service members in combat zones may qualify for the combat pay exclusion more on the. The foreign earned income exclusion is not automatic. The combat zone exclusion applies to wages and compensation paid by the US government to military and civilian employees.

Under the exclusion taxpayers can choose to exclude their foreign earned income from gross income up to a certain dollar amount. In a combat zone as designated by the President in an executive order a qualified hazardous duty area designated by Congress while receiving Hostile Fire Pay or Imminent Danger Pay in accordance with 37 USC 310. For tax year 2018 that dollar amount limit is 103900. How the Combat Zone Tax Exclusion Works The Combat Zone Tax Exclusion is a tax benefit which must be applied for when filing the current years tax returns or when filing amended returns for previous tax years.

What you may or may not know is that contributions to a Roth account IRA or TSP and the earnings on them are not taxed upon withdrawal. For a military contractor to be able to qualify for combat zone tax benefits the contractor or employee of the contractor needs to meet at least one of the following three options according to the IRS. If a soldier receives payment for an idea or innovation developed in a combat zone its excluded from gross income source.