Combat pay, although excluded from gross income, is still considered during the need analysis for federal student aid purposes. It is reported as untaxed income on Worksheet B of the FAFSA. It should also be included in the earned income figures reported on the FAFSA.
The IRS has defined Excludable and Non-Excludable combat service income as follows:
- 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.
Defining Combat Pay
According to Military.com, members of the Armed Services qualify for combat pay if they are subject to or wounded by hostile fire or explosive mines, or on duty on foreign soil and subject to the threat of physical harm or imminent danger due to civil unrest, civil war, terrorism, or wartime conditions.
- Combat pay is a bonus paid to military service personnel who are serving in regions that are designated hazard zones.
- The additional pay is generally not subject to federal income tax although Social Security and Medicare taxes are deducted.
- However, combat pay is factored into applications for student aid made through the FAFSA
The Department of Education has outlined how to answer questions regarding combat pay on the FAFSA for Students and Parents:
For Students: How much combat pay or special combat pay did you report in your adjusted gross income? This is question 43e on the paper Free Application for Federal Student Aid (FAFSA®) form.
Enlisted persons and warrant officers— Combat pay is nontaxable, and you should report zero for combat pay or special combat pay.
Commissioned officers—Combat pay in excess of the highest enlisted person’s pay (plus imminent danger/hostile fire pay) is taxable.
To calculate the taxable amount, use the total combat pay from your serviceperson’s leave and earnings statements and subtract the untaxed portion, which is reported in box 12 of the W-2 form with code Q.
For Students: How much combat pay or special combat pay did you report in your AGI? This is question 44e on the paper FAFSA.
Enter the total amount of taxable combat pay or special combat pay that you (and if married, your spouse) received in 2017. Only enter the amount that was taxable and included in the adjusted gross income. Do not enter untaxed combat pay reported on the W-2 in Box 12, Code Q.
For Parents: How much combat pay or special combat pay did your parents report in their adjusted gross income? This is question 91e on the paper Free Application for Federal Student Aid (FAFSA®) form.
Enlisted persons and warrant officers— Combat pay is entirely nontaxable, and your parent(s) should report zero for combat pay or special combat pay.
Commissioned officers—To calculate the taxable amount, use the total combat pay from the leave and earnings statements of your parent(s) and subtract the untaxed portion, which is reported in box 12 of the W-2 form with code Q.
For Parents: Parents’ Taxable Combat Pay Reported in AGI. This is question 93e on the FAFSA.
The response indicates the total amount of taxable combat pay or special combat pay that the student’s parents received in 2017. Only enter the amount that was taxable and included in the adjusted gross income. Untaxed combat pay reported on the W-2 in Box 12, Code Q should not be included.
