Tax-Free Pay? The Combat Zone Perk Deployers Should Know

When you’re deployed, the mission comes first – but it’s nice when your paycheck gets a boost too.

I’ve deployed many times over 32 years and I know firsthand how valuable the Combat Zone Tax Exclusion (CZTE) can be. It’s one of many financial perks of serving in a combat zone, allowing you to keep more of your hard-earned pay because all (or most) of your pay is tax-free. Whether you’re an enlisted Service member or officer, CZTE puts extra money back in your pocket each month!

Who’s eligible?

Not every Sailor, Marine, Soldier, Airman, Guardian, or Coast Guardsman is eligible; you must meet these three requirements.

• Active-Duty Status—you must be on active duty in the U.S. Armed Forces.
• Service in a Combat Zone—you must serve in a designated combat zone.
• Presence in the Zone—you must be present in the combat zone for any part of a month to qualify for the exclusion for the entire month.

How much is tax free?

If eligibility is met, 100% of enlisted and warrant officer pay (including basic pay, special pay, and incentive pay) is excluded and this includes reenlistment or career incentive bonuses.

Commissioned officers, paygrades from O-1 and above, are limited to the highest rate of enlisted pay plus hostile fire/imminent danger pay (HFP/IDP) each month. For example, if the highest enlisted pay is $10,295 and the officer receives the full $225 HFP/IDP, the maximum CZTE for that month would be $10,520.

CZTE only effects active-duty pay.  Income is still taxable from a side hustle or civilian job. If you’re married, spousal income is not tax exempt, unless your spouse meets the requirements.

What about filing taxes?

Your Service is responsible to certify your entitlement to CZTE.  When you receive your W-2 for the previous year from DFAS, any CZTE eligible pay is excluded from gross income shown in Box 1 (Wages, tips, other comp.).  If the amount in Box 1 is not correct, you should contact your Service to issue a corrected W-2.  So, be sure to keep accurate records (orders and LESs).

Military OneSource offers free confidential, one-on-one tax assistance for service members and their families.  If you prefer to file your taxes on your own  Military OneSource’s MilTax offers free, tax software and support.

Are there other benefits?

Yes!  Here are some other benefits, beyond tax-free income that you can take advantage of:

• Qualified Reservist Distribution (QRD). A QRD is a distribution from certain retirement or health flexible spending plans, that avoids penalties.  Eligibility requires you to be a Reservist called to active duty for more than 179 days.  However, a QRD is included in your gross income and is taxable.
• Uniformed Services Thrift Savings Plan (TSP). There are two key benefits to making TSP contributions in a combat zone:
  • Normally, your TSP contributions are limited to $23,500 (2025), or more if you are over the age of 50. However, this limit increases to $70,000 (2025) in a combat zone tax exclusion area. If you participate in the Blended Retirement System, the $70,000 limit includes your contributions plus automatic and Service matching contributions
  • If your contributions include tax-exempt combat zone pay, the part of the distribution attributable to those contributions is tax exempt. However, the earnings on the tax-exempt portion of the distribution are taxable. See TSPBK26, Tax Rules About TSP Payments, for additional details.
• Tax Filing Extensions. The IRS automatically extends the tax filing deadline and payment owed for 180 days after the last day you are in a combat zone or from continuous qualified hospitalization for injury received in a combat zone.  Visit Tax information for members of the military, at IRS.gov.
• Savings Deposit Program (SDP). SDP provides Service members the ability to accelerate their savings.  After 30 days in a combat zone, your SDP account’s interest compounds monthly and is paid quarterly at a rate of 10% on balances of up to $10,000.  Any amount in excess of $10,000 will not accrue interest.  Learn more about the SDP here.

Leveraging the financial benefits available while you’re deployed, especially CZTE, goes a long way in helping you achieve your goals.  Stay safe and save smart!

The USAA Educational Foundation is a nonprofit, tax-exempt IRS 501(c)(3) and cannot endorse or promote any commercial supplier, product, or service. The content of this blog is intended for information purposes only and does not constitute legal, tax, or financial advice.