Tax Problems of U.S. Soldiers in Iraq

Monday, May 24, 2004

Congress has enacted various tax breaks for members of the U.S. Armed Forces, including section 112 which excludes from income military pay for soldiers serving in combat zones like Iraq. The IRS has a very helpful web site and publication (Publication 3: Armed Forces' Tax Guide) explaining these tax benefits. Yet a recent GAO Report, Active Duty Military Compensation and Its Tax Treatment (GAO-04-721R), reports that the section 112 income exclusion has adverse tax consequences because of its interaction with other tax benefits, and that the adverse consequences get worse the longer a solder is stationed in a combat zone:

The complex interactions between the combat zone exclusion and certain tax credits (principally the Earned Income Tax Credit and the Additional Child Tax Credit) appear to be creating unintended consequences. Specifically, some low-income-earning service members who serve in a combat zone are worse off for tax purposes, while some higher-income-earning members are better off because they become eligible for a tax credit that is normally targeted to low-income workers.

Our analysis suggests that some of the roughly 430,000 members serving in a combat zone in 2003—between 5,000 and 10,000 members in one-earner households—suffered a net loss of tax benefits.... [T]he number of members losing tax benefits could be larger in 2004 depending on the how many service members are in a combat zone and how long they are there.

For recent press reports, see hereand here.