Members of the Armed Forces receive many different types of pay and allowances. Some are included in gross income while others are excluded from gross income. Included items are subject to tax and must be reported on your tax return. Excluded items are not subject to tax, but may have to be shown on your tax return.

For information on the exclusion of pay for service in a combat zone and other tax benefits for combat zone participants, see Combat Zone Exclusion and Extension of Deadline, later.

Included Items

These items are included in gross income, unless the pay is for service in a combat zone.

Basic pay	· Active duty
	· Attendance at a designated service school
	· Back wages
	· Drills
	· Reserve training
	· Training duty
Special pay	· Aviation career incentives
	· Diving duty
	· Foreign duty (outside the 48 contiguous states and the District of Columbia)
	· Hazardous duty
	· Hostile fire or Imminent danger
	· Medical and dental officers
	· Nuclear-qualified officers
	· Special duty assignment pay
Bonuses	· Enlistment
	· Reenlistment
Other payments	· Accrued leave
	· Personal money allowances paid to high-ranking officers
	· Student loan repayment from programs such as the Department of Defense Educational Loan Repayment Program when year's service (requirement) is not attributable to a combat zone.

Excluded Items

The exclusion for certain items applies whether the item is furnished in kind or is a reimbursement or allowance. There is no exclusion for the personal use of a government-provided vehicle.

Special Pay	· Compensation for active service while in a combat zone or a qualified hazardous duty area. Note: Limited amount for officers.
Living allowances	· BAH (Basic Allowance for Housing) You can deduct mortgage interest and real estate taxes on your home even if you pay these expenses with your BAH.
	· BAS (Basic Allowance for Subsistence)
	· Housing and cost-of-living allowances abroad whether paid by the U.S. Government or by a foreign government.
	· OHA (Overseas Housing Allowance)
Family allowances	· Certain educational expenses for dependents
	· Emergencies
	· Evacuation to a place of safety
	· Separation
Death allowances	· Burial services
	· Death gratuity payments (up to $3,000) to eligible survivors
	· Travel of dependents to burial site
Moving allowances	· Dislocation
	· Move-in housing
	· Moving household and personal items
	· Moving trailers or mobile homes
	· Storage
	· Temporary lodging and temporary lodging expenses
Travel allowances	· Annual round trip for dependent students
	· Leave between consecutive overseas tours
	· Reassignment in a dependent restricted status
	· Transportation for you or your dependents during ship overhaul or inactivation
	· Per diem
Other payments	· Defense counseling
	· Disability, including payments received for injuries incurred as a direct result of a terrorist or military action
	· Group-term life insurance
	· Professional education
	· ROTC educational and subsistence allowances
	· Survivor and retirement protection plan premiums
	· Uniform allowances
	· Uniforms furnished to enlisted personnel
In-kind military benefits	· Legal assistance
	· Space-available travel on government aircraft
	· Medical/dental care
	· Commissary/exchange discounts

Foreign Source Income

If you are a U.S. citizen with income from sources outside the United States (foreign income), you must report all of that income on your tax return unless it is exempt by U.S. law. This is true whether you reside inside or outside the United States and whether or not you receive a Form W-2, Wage and Tax Statement, or a Form 1099 statement from the foreign payor. This applies to earned income (such as wages and tips) as well as unearned income (such as interest, dividends, capital gains, pensions, rents, and royalties).

Certain taxpayers can exclude income earned in foreign countries. For 2001, this exclusion amount is $78,000. However, the foreign earned income exclusion does not apply to the wages and salaries of military and civilian employees of the U.S. Government. Employees of the U.S. Government include those who work at Armed Forces post exchanges, officers' and enlisted personnel clubs, and embassy commissaries, and similar personnel paid from nonappropriated funds. Other foreign income earned by military personnel or their spouses may be eligible for the foreign earned income exclusion. For more information on the exclusion, get Publication 54.

Residents of American Samoa may be able to exclude income from certain possessions. This possession exclusion does not apply to wages and salaries of military and civilian employees of the U.S. Government. If you need information on the possession exclusion, get Publication 570, Tax Guide for Individuals With Income From U.S. Possessions.

Community Property

The pay you earn as a member of the Armed Forces may be subject to community property laws depending on your marital status, your domicile, and the nature of the payment. The community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

Marital status. Community property rules apply to married persons whose domicile during the tax year was in a community property state. The rules may affect your tax liability if you file separate returns or are divorced during the year.

Domicile. Your domicile is the permanent legal home you intend to use for an indefinite or unlimited period, and to which, when absent, you intend to return. It is not always where you presently live.

Nature of the payment. Active duty military pay is subject to community property laws. Armed Forces retired or retainer pay may be subject to community property laws.

For more information on community property laws, get Publication 555, Community Property.

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