Whether you’re a service member, a military spouse, or a civilian contractor supporting forces overseas, deployment can change which income is taxable, which deadlines apply, and which deductions or credits you can claim. Here are tax rules that are most likely to affect deployed service members.

 

1) Combat pay and the combat-zone exclusion

If you serve in a designated combat zone or qualifying contingency operation, some or all of your pay may be nontaxable under the combat-zone exclusion. That nontaxable combat pay is reported on your pay statements but excluded from taxable income, however, you can elect to include it for certain benefits (see EITC below). Check the IRS list of recognized combat zones and Publication 3 for the exact rules that apply to your dates of service and the amounts excluded. 

Tip: Keep orders and deployment records. Exclusion eligibility is based on the service dates and location.

 

2) Filing and payment deadline extensions during deployment

If you are serving in a combat zone or are otherwise covered as a service member abroad, the IRS generally provides automatic extensions for filing, paying, and certain other tax actions for the period you are in the combat zone plus additional days in some cases. These extensions also can apply to certain civilians serving in support roles and, in many cases, spouses, but there are exceptions, so confirm your status. If you miss the regular filing deadline because you were covered, you will not be charged penalties for late filing or payment for the covered period.

Tip: Even with an extension, any tax owed after the covered period will accrue interest from the original due date, so estimate and pay if possible.

 

3) Earned Income Tax Credit (EITC) and combat pay

Nontaxable combat pay can affect eligibility and the size of the Earned Income Tax Credit. The IRS lets eligible service members choose whether to include nontaxable combat pay in the EITC calculation. In some cases including it increases your EITC; in other cases it does not, so it’s worth running both calculations (with and without the combat pay) to see which is better for you. Publication 596 and the Armed Forces guidance explain the options.

Tip: Try both calculations when preparing returns (software usually does this automatically if you indicate combat pay).

 

4) Moving expenses for active-duty service members (PCS)

The 2017 Tax Cuts and Jobs Act eliminated the moving-expense deduction for most taxpayers, but active-duty members of the Armed Forces who move because of a permanent change of station (PCS) may still deduct unreimbursed moving expenses (Form 3903). Keep receipts for transportation, storage (within IRS time limits), and allowable travel costs. Check the current Form 3903 instructions to confirm eligible expenses and documentation requirements.

Tip: If your move is fully reimbursed by the military, you generally cannot claim a deduction for reimbursed items. Track reimbursements carefully.

 

5) State residency & the Military Spouses Residency Relief Act (MSRRA)

Deployment often raises the question “Which state taxes me (or my spouse)?” Federal protections and the MSRRA help reduce state tax burdens caused by temporary moves. Generally: A service member’s military pay is taxed only by their state of legal residence (domicile), not by the state where they are stationed.

The Military Spouses Residency Relief Act prevents many states from taxing a spouse’s income simply because the spouse is residing in that state solely due to military orders, but there are procedural steps and exceptions, and states differ in implementation. Because states differ and rules change, check your state tax authority’s military guidance and preserve your domicile documentation (driver’s license, voter registration, tax returns) if you intend to retain a particular state as home. 

Tip: If you or your spouse change domicile while deployed, document it: rental/lease agreements, voter registration, driver’s license, or an executed state residency form can matter later.

 

6) Other issues to watch

• Social Security/Medicare and retirement pay: Retirement and certain benefits have special rules. Plan distributions should be reviewed with a counselor.
• Injured service members: Special extensions or waiver rules can apply if you were hospitalized or injured while serving.
• Contractors & civilian employees: Some contractors or civilians working overseas may qualify for the Foreign Earned Income Exclusion (FEIE) or other relief; rules differ from military-specific rules. Consult Publication 54 and IRS pages for details.

 

Quick checklist of what to consider

• Save deployment orders, travel records, and pay statements.
• Note exact deployment dates and locations (for combat-zone eligibility).
• Track reimbursements vs. out-of-pocket expenses (moving, travel).
• Review state residency/domicile documentation and MSRRA rules.
• Run EITC calculations both ways if you received combat pay.
• If you qualify for extensions, file as soon as practical after you return to avoid interest on unpaid taxes.

 

What we can do for you

At Walters Financial Wellness we help service members, military families, and civilians affected by deployment by offering:

• Year-round tax planning (retirement distributions, estimated payments, and tax-efficient pay/reimbursement strategies) tailored to frequent relocations and deployments.

Contact us today for a consultation!

 

**Disclaimer: The information provided in this blog post is for educational and informational purposes only and should not be considered tax, legal, or financial advice. Tax laws and regulations can change and may vary based on individual circumstances, including military status and deployment details. You should consult with a qualified tax professional, financial advisor, or legal expert before making decisions related to your personal finances or taxes. The author and publisher assume no responsibility for any actions taken based on the information contained herein.

 

**Sources

• IRS — Tax exclusion for combat service / Combat zones and related guidance. IRS+1
• IRS — Filing extensions and tax-return assistance for military personnel stationed abroad or in a combat zone. IRS+1
• IRS — Publication 3, Armed Forces’ Tax Guide (current edition). IRS
• IRS — Form 3903 instructions (moving expenses for members of the Armed Forces). IRS
• IRS — Military and clergy rules for the Earned Income Tax Credit (EITC) and handling of nontaxable combat pay. IRS
• Military OneSource / official military resources — Military Spouses Residency Relief Act (MSRRA) guidance and state implementation notes. Military OneSource+1