Nontaxable Combat Pay Election

Line 64b of Form 1040 is used in conjunction with the Earned Income Credit (EIC). It is a place where taxpayers who served in the military and received combat pay (which is nontaxable) may elect to classify their pay as “earned income” for purposes of the EIC. Military members may locate their nontaxable combat pay amount on the Form W-2 (Box 12, Code Q) issued by their employing military branch.

Electing to include nontaxable combat pay in earned income may increase or decrease one’s EIC. As a result, taxpayers considering the election should always calculate the EIC both ways (with and without combat pay inclusion) to determine which option results in the preferable tax position. Major factors affecting the increase/decrease include the taxpayer’s total earned income, filing status, and number of qualifying children. As a general rule, taxpayers with earned income (all non-combat pay income) exceeding the following values will not benefit by including combat pay in their earned income

-$6,200 if taxpayer has 0 children.
-$9,300 if taxpayer has 1 child.
-$13,050 if taxpayer has 2+ children.

Taxpayers who earned below the above values should be certain to calculate their EIC after including combat pay – it may reduce their tax liability! Taxpayers choosing to make the election should enter their total amount1 of nontaxable combat pay on Line 64b of Form 1040. Alternatively, taxpayers choosing not to make the election should leave Line 64b blank.

The following hypothetical illustrates a taxpayer’s dilemma to either include or exclude nontaxable combat pay with the EIC. Imagine Andy and Courtney are married with one qualifying child and are filing a joint return. Andy is in the military and earned $15,000 ($5,000 taxable wages + $10,000 nontaxable combat pay) for the year. Courtney worked part-time during the year and earned $2,000. As a result, their taxable earned income and AGI are both $7,000. Andy and Courtney qualify for the EIC and, while completing the EIC Worksheet (page 8) without adding the combat pay to their earned income, discover their credit to be $2,389. Conversely, when they include the combat pay in their earned income the credit totals $3,169. Because making the election will increase their EIC, they elect to add the nontaxable combat pay to their earned income for the EIC. They enter $3,169 on Line 64a of their Form 1040 as well as on Line 64b to represent their nontaxable combat pay.

NOTE: Those taxpayers (1) filing jointly (2) with a spouse who also received nontaxable combat pay can make his/her own election regardless of their spouse’s decision.

1Taxpayers must include in earned income all nontaxable combat pay received during the year.

Photo by: The U.S. Army