If you are an eligible member who served in a combat zone, the IRS can exclude your income from taxation. Publication 3, Armed Forces' Tax Guide, the authoritative source for all military specific tax matters, covers the Combat Zone Exclusion. Read below for a summary of the policy. Requirements You must be a member of the United States Armed Forces. Entitlement to the compensation must have fully accrued in a month during which the member served in a designated combat zone or was hospitalized as a result of wounds, disease, or injury incurred while serving in a designated combat zone. Actions There is no required action for you to receive the exclusion. Each military organization will automatically certify your entitlement by excluding reportable income on your W-2. If you believe you are entitled, and your W-2 reflects your full, unadjusted annual pay and benefits, contact your military pay office to issue a corrected W-2. Provisions Excludable Income – You can exclude the following income related to military compensation: Basic Pay – All for every month you are present in a combat zone. Reenlistment or Continuation Bonuses – You can exclude this income if the reenlistment or the execution of the contractual agreement for continued service occurred while present in a combat zone. School Loan Repayments – You can exclude part of the repayment associated with the months you were present in a combat zone. For example, if a year is required to earn the repayment and you serve six of those months in a combat zone, you can exclude half of the repayment income. Imminent Danger/Hostile Fire Pay – You can exclude all of this income. Leave Benefits – You can exclude income from selling accrued leave earned while in a combat zone. Awards and other Financial Incentives – You can exclude associated income for submissions made while in a combat zone. Non-Excludable Taxes – Military pay for earned while in a combat zone is subject to Social Security and Medicare taxes and will appear on your W-2. Period Covered – You will receive the exclusion for months you served in a combat zone, including partial months of service. One or more days served in a combat zone during any month counts as a full month. Limits – The following limits are placed on your exclusion: Enlisted Members – You can exclude all military pay for each month present in a combat zone. Warrant Officers – You can exclude all military pay for each month present in a combat zone. Commissioned Warrant Officers – You can exclude all military pay for each month present in a combat zone. Commissioned Officers – You are limited to the highest rate of enlisted pay plus imminent danger/hostile fire pay for each month present in a combat zone. Married Personnel – The following exclusion combinations are authorized: Both are Military and Served in a Combat Zone – Both may receive the tax exclusion for the months they were present in a combat zone. Both are Military and One Served in a Combat Zone – The spouse who served in a combat zone may receive the tax exclusion for the months they were present in the combat zone. One is Military and Served in a Combat Zone – The spouse who served in a combat zone may receive the tax exclusion for the months they were present in the combat zone. Hospitalization – You can exclude military compensation earned during hospitalization (in or out of a combat zone) due to wounds, disease, or injury incurred in a combat zone. If a member of the Armed Forces is hospitalized for a part of a month as a result of wounds, disease, or injury incurred while serving in that zone, the member is entitled to the exclusion for the entire month. Military pay received for hospitalization that extends beyond two years from the last month of presence in a combat zone is not excluded.