Tax Free Questions

[Guest angry tanker]

Finace Guy (or any expert)

quick question on the reg about combat zone tax exclusion. the first part of the reg says if you are flying in the designated area (say the persion gulf) you are eligible, the next line says in direct support of combat missions. does this mean that if i am say giving gas to a bomber airborne, but not in the designated combat zone, or a ground guy (again not in a designated combat zone) who loads bombs on a bomber which flies a combat mission, am i eligible for the tax break?

[Guest Flight Doc]

Obviously I'm not the subject matter expert here, but I've been deployed a lot and can tell you what I've seen with illustrative examples. I've done Provide Comfort, ONW, OSW, and OEF. I asked someone I know who just got back from Diego Garcia about their situation.

First of all, if you are entitled to Hostile Fire Pay (HFP) or Imminent Danger Pay (IDP), you are automatically entitled to Combat Zone Tax Exclusion (CZTE). All of the above is done on a monthly "all or nothing" basis. A single nanosecond in the designated area is enough for that month.

The Cliff Notes version is that you need to be on the ground, on/under the waters, or in the airspace of a designated HFP or IDP area on duty and not transiting the area. Such areas may be established by Public Law or Executive Order. In either case, there will be a specific designation with a start date, and, once the situation is over, an end date. Airspace or adjacent waters may or may not get you the HFP/IDP, depending on the way it was designated.

In some circumstances, you can be eligible for CZTE without HFP or IDP. The DoD FMR (V7A Ch 44) says that people "nearby" a combat zone or imminent danger area may be eligible for CZTE. The question is what constitutes nearby?

For example, before OEF, the land area of the Sultanate of Oman was entitled to CZTE, but not HFP or IDP based on this.

Examples:

AMC crew flies troops from Ramstein to Bahrain, RON, and return. They are eligible for HFP because Bahrain is a designated HFP area and their mission was to go there in support of operations.

Now, the troops on this same aircraft happen to be bound for Diego Garcia. They RON in Bahrain and catch a Cat B flight to Diego Garcia. They are *not* eligible for HFP or CZTE because they were just enroute.

They get to Diego Garcia. Some of them are ACC aircrew and fly O-1 missions into the airspace of Afghanistan. They get HFP (and therefore CZTE). The Ammo and MX guys supporting them (and medical troops) who never leave Diego are SOL.

Now the example we don't look forward to:

Your aircraft or vessel is fired upon or mined by a hostile force or you are wounded or killed by hostile forces. You're eligible for that month, no matter where you are.

Hope this helps.

[ 26 March 2003, 20:23: Message edited by: Flight Doc ]

[Guest financeguy]

Yes, if you are flying in a specified zone passing gas in support of a mission you are eligable. That is your official duty in which you are conducting. However, if you are just taking a hop (flying and not conducting duties) and fly into a designated area you are not eligable. Example: If I (Finance Troop) were to deploy to an area in which CZTE is not authorized and fly into one of the specified zones enroute, I am not eligable because I was not conducting my official duties while in that zone. Flight Doc did a good job of giving the references and other examples... Let me know if you have more questions...

[Champ Kind]

5 Year Thread Revival!

This stems from a conversation we were having in my squadron regarding tax-free leave.

I browsed the Portal and e-publications for a finance reg that governs this, but I couldn't find anything that specifically answered my question.

When you use leave that was accrued during time served in the combat zone, is that whole month considered tax free, or just the number of days taken that you earned while in said combat zone.

Hypothetical:

You were deployed 120 days over the span of 5 calendar months, therefore accruing 12.5 days of leave while in the combat zone. You arrive back home in October, but you don't use any LEAVE until that next January. When you take leave in January, do you get all of January tax free, or just up to those 12.5 days that you earned while deployed? I could see merit in arguments for or against.

I haven't gone into finance here on base yet only because I like to get my facts straight, with documentation highlighted, before I go talk to those clowns (provided I can even catch them during their 1000-1500 hours, but that's for another thread!). No one in the squadron seems to have a definite answer.

Thanks!

[Murph]

Just those days are "prorated" tax free.

[Fontus]

Here is how it works...

Each month you acrue 2.5 days of paid leave (paid being the operative word here). When you deploy to a combat tax exclusion zone, your basic pay and entitlements are tax free, therefore you have 2.5 days of "tax-free" leave. If you take that leave in a month that you haven't recieved a combat tax exclusion, then the pay that you recieve for that day of leave is tax free and you will recieve some money back in your pay check. There are some caveats.

1) "tax-free" leave is the first leave that you use, so if you take leave in the same month that you deployed, you will not recieve any extra cash.

2) You can't sign a reenlistment bonus on your "tax-free" leave day and get that bonus tax free (remember you are on leave)

3) As always, O's get tax free up to the highest enlisted pay grade, and not the entire basic pay

Hope that helps

Fontus

[Fontus]

do you have the reg where it says all that info?

You shouldn't need it as the process is transparent to you. You can check your "tax exempt" leave balance on your LES (it is in the comment section, where you find out such important information as the fact that the air force is looking for military training instructors). If you don't have anything listed there then you don't have any tax exempt leave.

Fontus

[Finance_Guy]

5 Year Thread Revival!

This stems from a conversation we were having in my squadron regarding tax-free leave.

I browsed the Portal and e-publications for a finance reg that governs this, but I couldn't find anything that specifically answered my question.

When you use leave that was accrued during time served in the combat zone, is that whole month considered tax free, or just the number of days taken that you earned while in said combat zone.

Hypothetical:

You were deployed 120 days over the span of 5 calendar months, therefore accruing 12.5 days of leave while in the combat zone. You arrive back home in October, but you don't use any LEAVE until that next January. When you take leave in January, do you get all of January tax free, or just up to those 12.5 days that you earned while deployed? I could see merit in arguments for or against.

Thanks!

All the other posts appear correct. You may want to Check in AFI-65-116 Vol 1, chapter 44 for references.

Only those days you earned in a CZ and taken later in a non-CZ month would show as tax free. So if you earned 12.5 days and took 10, then your taxable base pay for that month would be 1/3 less. And no, bonuses effective while on any tax free leave are not also tax-free. Bonuses are only tax-free when the effective date is in a month you earned tax exclusion for that whole month. For officers, if you already capped out the maximum tax-free (highest enlisted), then no portion of the bonus is tax free. I almost want to say the regs don't allow for any CZ exemption for officer bonuses.

What happens to many people is they take leave right after arriving home while still in a tax-free month, so they don't see the extra benefit. Example: Earned 12.5 days of tax-free LV, Depart CZ on 1 Oct, arrive home on 2 Oct. Take Recon. for 12 days, then LV from 15-27 Oct. Since Oct is already tax-free from being in the zone on 1 Oct, those 12 days are used up since they were the last days of leave earned and no extra tax exemption.

As for your example arriving back in Oct and you don't take leave until Jan, you probably would not get all 12.5 days as tax free. I recall someone else mentioned your last leave earned is first leave used. So, taking leave in Jan would first use up an balance you already accrued in Jan (leave accrues by .5 days every 6 days of active duty), then your Dec LV of 2.5, Nov of 2.5, then you start hitting the balance of leave earned in Oct, Sep and on back. So in your example, you may only get about 7 days of tax-free due to earning leave later (5 days) that was not tax-free. This can get really technical when you begin calculations down to the level of earning a half day for every 6 days...but that's what the system does. In theory, you may never hit your tax-free leave until you take terminal leave when separating or retiring. Just depends on how much leave you take.

Although a little confusing, the AFI puts it this way:

44.7.2.2. Whenever a member takes leave, the balance as of the end of the leave is compared to the balance as of departure (from the CZ). If the balance as of the end of the leave is less than the balance as of departure, the balance as of the end of the leave becomes the new maximum.

I also want to mention that you don't always get tax-free in all HFP or IDP areas . Turkey is a perfect example since Jan 06. You get IDP, but no tax-free. Some areas (mainly airspaces) get CZTE, but no HFP or IDP.

[DeHavilland]

Finance Guy-

This is good stuff which generates a further 2 questions on my part.

I am in a location which requires me to fly into a CZTE/HFP/IDP area a few times a month. The super advantage is that I do this from home station so I rarely have to RON in these locations. As such every month I am tax free. I never really paid attention/understood the "Tax Exempt LV Bal" thing on my LES as I am tax free every month and am always taking my leave in a tax free month.

So, do I understand this correctly in a hypothetical situation that I have say 20 days of tax exempt leave balance. As I PCS, I take a 20 day leave starting on the 1st day following the last month that I was tax free. So, a 20 day pro-rata share of that months base pay is tax free?

On a related matter, my TSP shows an amount "exempt". This amount will remain tax exempt as opposed to "deferred" for the life of the investment correct?

[Finance_Guy]

Finance Guy-

This is good stuff which generates a further 2 questions on my part.

I am in a location which requires me to fly into a CZTE/HFP/IDP area a few times a month. The super advantage is that I do this from home station so I rarely have to RON in these locations. As such every month I am tax free. I never really paid attention/understood the "Tax Exempt LV Bal" thing on my LES as I am tax free every month and am always taking my leave in a tax free month.

So, do I understand this correctly in a hypothetical situation that I have say 20 days of tax exempt leave balance. As I PCS, I take a 20 day leave starting on the 1st day following the last month that I was tax free. So, a 20 day pro-rata share of that months base pay is tax free?

On a related matter, my TSP shows an amount "exempt". This amount will remain tax exempt as opposed to "deferred" for the life of the investment correct?

Given your scenario, I have to say yes, those 20 days would reduce your taxable wages in that month. EX. Base Pay is 3,000.00 (normally taxable for those not in the CZ), so you would only be taxed on 1,000. (3,000 divided by 30, mult. by 10 days, = $1,000 taxable base pay). Basically whenever those 20 days are taken ( or any lesser amount) , your taxable wages are reduced.

On the TSP question, yes. Once those contributions go into TSP as Exempt, those amount stay exempt forever. However, any earnings from those amounts would not be exempt. Don't ask me how TSP keeps track of all this when you decide to withdraw funds from TSP when that time comes (age 59.5?).

[DeHavilland]

Finance Guy -

Thanks for the answers and here is another scenario for you. While I am tax free every month, I don't get the HFP/IDP and taxes back until the following month. IE fly into a CZTE on 1 June, I still pay taxes and don't see the extra pay on Junes LES. It always shows up on Julys LES as a tax refund and the extra pay. While deployed to a CZ, this was not the case. It is just how it goes when flying from Livingroom AFB to a CZTE every month.

At the moment Finance and I need to have discussion as they are missing 3 months of my tax free. Getting that back should be pretty simple by showing them the paperwork that they signed accepting my paperwork.

My question is are the LES "computers" tied into the TSP "computers"? Because I am tax free for 12 months of each year, my TSP YTD Deductions and Exempt amounts should be the same. The are not and the differences are from the 3 months of missing tax free time which shows up as an amount in the Deferred column. So, when they fix the missing 3 months of CZTE, will it automatically update the correct amounts on the YTD and Exempt columns? I can only hope it will be that easy.

It will certainly be up to me to keep the TSP straight when I start drawing money out to make sure they keep the exempt amounts correct.

[Finance_Guy]

My question is are the LES "computers" tied into the TSP "computers"? Because I am tax free for 12 months of each year, my TSP YTD Deductions and Exempt amounts should be the same. The are not and the differences are from the 3 months of missing tax free time which shows up as an amount in the Deferred column. So, when they fix the missing 3 months of CZTE, will it automatically update the correct amounts on the YTD and Exempt columns? I can only hope it will be that easy.

As I understand the systems, they do update data to the TSP program. So once those 3 months are updated, TSP should be notified to change those contributions to exempt vice the deferred.

I would highly recommend you work with finance to get those 3 months updated before 6 Jan. Doing so will ensure you receive a correct W-2 the first time. Since the pay system has rolled to 2008, you will not see the taxes refunded, but your taxable wages would be reduced from what shows on your current Dec LES--any tax refund for those months would occur once you file your 2007 income tax return. You will see the $225/month post to your Jan pay, but again, since the system is in Jan 08 update mode, those amounts will be considered 2008 exempt income.

[Murph]

For Finance Guy (or anyone else, really)--I arrived in OEF late December--too late for the Dec LES, so I ended up paying taxes that month. Unfortunately, I never got reimbursed for December tax free in the Jan LES. Finance told me the tax free will be reimbursed when I file my taxes. My W-2 was correct, in that it doesn't count December's salary, but it does show that I was taxed during that time.

Maybe someone can help me understand why/how filing my taxes will pay me back for the tax free in Dec.

[Fontus]

For Finance Guy (or anyone else, really)--I arrived in OEF late December--too late for the Dec LES, so I ended up paying taxes that month. Unfortunately, I never got reimbursed for December tax free in the Jan LES. Finance told me the tax free will be reimbursed when I file my taxes. My W-2 was correct, in that it doesn't count December's salary, but it does show that I was taxed during that time.

Maybe someone can help me understand why/how filing my taxes will pay me back for the tax free in Dec.

When you file your taxes, you pay tax on your taxable income. During the year, Uncle Sugar takes out his cut each month. Your W-2 shows that he took out his cut for December (i.e. it shows that you were taxed in Decemeber), but that month was not "taxable income" (i.e. your W-2 doesn't count December's salary).

Therefore when you file your taxes, your W-2 will show that you paid taxes during the month of December when you didn't need to and you will recieve that amount as a refund when you file your taxes.

Hope that helps.

Fontus

You don't need a W-2C because your current W-2 is correct

Edited January 28, 2009 by Fontus

[Finance_Guy]

When you file your taxes, you pay tax on your taxable income. During the year, Uncle Sugar takes out his cut each month. Your W-2 shows that he took out his cut for December (i.e. it shows that you were taxed in Decemeber), but that month was not "taxable income" (i.e. your W-2 doesn't count December's salary).

Therefore when you file your taxes, your W-2 will show that you paid taxes during the month of December when you didn't need to and you will recieve that amount as a refund when you file your taxes.

Hope that helps.

Fontus

You don't need a W-2C because your current W-2 is correct

Couldn't have said it better myself. Fontus is right on. Once the pay system rolls into the next calendar year, it cannot refund taxes but will adjust the total taxable wages for the prior year. When the pay adjustment occurs before the W2s are ran, then there is no need for a corrected W2. Any adjustments made after the first W2s are issued automatically generate a corrected W2 and are usually posted to myPay within 5 days.

[Guest STLCFII]

Is the tax free pay only for military pay or does it count towards civilian pay as well? Example... Reserve C5 guy, who also flies for an airline, does a week tour that includes numerous flights in/out of the Middle East. He works the rest of the month at the airline. Will all the pay he earns that month be tax free? Thanks.

[Finance_Guy]

Is the tax free pay only for military pay or does it count towards civilian pay as well? Example... Reserve C5 guy, who also flies for an airline, does a week tour that includes numerous flights in/out of the Middle East. He works the rest of the month at the airline. Will all the pay he earns that month be tax free? Thanks.

Only counts for military pays. On the rumor on changing tax free calculation rules, I've not heard anything official. Seems a day-by-day calculation of tax-free would be a big pain in the ass for DFAS to figure out and keep straight but for some reason it does make sense. Why get an entire month tax free when only hitting the CZ for one day out of that month?

[pawnman]

I've got a dumb "newb" question...coming up on my first deployment...that tax free, does finance know to stop withholding taxes while I'm deployed, or do I just expect to get a giant tax return next year? Or option 3, do I have to tell finance to stop withholding taxes?

[Scooter14]

What should happen:

When you get there and inprocess, they should automatically know when to start your entitlements (HFP/Hardship Duty if applicable, CZTE).

Lets say you get there on May 27th. You won't see anything in your end of month for May, but by the end of June, you should see May's taxes refunded, as well as no tax withheld for June. You should also see your HFP for May and June and also your HDP, which gets prorated. You should see no income tax withheld for your remaining paychecks, as well as your other entitlements until you get home and file your voucher, and then you'll see the income tax getting withheld again.

It doesn't hurt to stop by Finance a week or so after you get there just to make sure you are in the system. Since you are in Rapid City, I'm gonna assume you're a Bone guy, which will lead me to my next statement...wear your reflective belt to finance at night or they won't help you.

As for your tax return, yes, you will get a bigger refund next year. The tax free thing is nice...you don't get the taxes withheld while you are gone which equates to more money in your pocket. Then, next January, you'll see your taxable income on your W2 is about 40-50% less than it was in years you haven't deployed. A lower taxable income=less money owed.

You'll be amazed at the numbers on your W2.

As an aside, if any Guardsmen read this, the ANG process is a lot more painful. You'll have to work it all through home-station finance.

[Toro]

Where are the designated tax-free zones listed/documented?

[Finance_Guy]

Where are the designated tax-free zones listed/documented?

Toro, they are listed in the DoDFMR, Vol 7A, Chapter 44

https://www.defenselink.mil/comptroller/fmr/07a/07a_44.pdf

Page 4, para 440103, begins the Executive Order declared zones and page 15 shows the areas that qualify based on direct support.

[JeepGuyC17]

Yes, but that was from 7 years ago and I read further down that there were rumors they were doing away with giving it for the entire month even if you were only there 1 day. Didn't think it would hurt to clarify.

Thanks for that.

So hypothetically, if I flew a mission like this every month for a year, I wouldn't pay taxes on my salary at all, even though I wasn't deployed?

I didn't pay any federal income tax last year. I got six months of tax free, and got the rest back because that put my taxable income below the minimum where I would owe taxes. This year's shaping up to be a similar situation.

[Finance_Guy]

Yes. You don't even have to land, just be in the airspace.

Not entirely true. You must be "assigned" to the airspace, i.e. airdrop, AWACs, or refueling etc. Merely transiting the airspace does not qualify. DODFMR vol. 7A provides more details.

https://www.defenselink.mil/comptroller/fmr/07a/07a_44.pdf

440103.C.4

"...The fact that most members are in an official duty status when flying through a designated airspace should not be construed to mean they are assigned to the airspace to perform duty and therefore entitled to the exclusion."

[C17Driver]

Not entirely true. You must be "assigned" to the airspace, i.e. airdrop, AWACs, or refueling etc. Merely transiting the airspace does not qualify. DODFMR vol. 7A provides more details.

https://www.defenselink.mil/comptroller/fmr/07a/07a_44.pdf

440103.C.4

"...The fact that most members are in an official duty status when flying through a designated airspace should not be construed to mean they are assigned to the airspace to perform duty and therefore entitled to the exclusion."

Which is why passengers transiting often don't qualify, but aircrew often do. We are assigned to the airspace when over-flying.

[Finance_Guy]

...but aircrew often do. We are assigned to the airspace when over-flying.

Not according to the DoDFMR...read my last post again with the quote from the para. If you are just flying passengers (or just flying empty) then aircrew would be no different. Now if you were assigned to do an airdrop, then I'd say yes.

But you know it doesn't matter what I think. This could go back and forth forever. I know for a fact there are many who have received CZTE entitlements who were not due them, but the forms were signed by ACs or SQ CCs that stated the member's were due it. 1881s I'm talking about.