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Colleen Sinclair Prosser, Attorney
Help Our Armed Forces
SinclairProsser Law, LLC
. http://www.sinclairprosserlaw.com

Help Our Armed Forces

American military personnel serving in combat zones have enough to worry about. They put their lives at risk every day, in hostile territory, while doing what they are called to do.
The compensation they earn while stationed in the combat zone is excludible from gross income. In other words, it is tax-free. This applies to all enlisted personnel and warrant officers for any month they served (even in part) in the combat zone. In addition, it covers any month during which they were hospitalized as a result of wounds, disease, or injury incurred in a combat zone (up until two years after the cessation of combat). Even officers pay in a combat zone is tax-free, up to the maximum amount of pay for enlisted personnel.
This seems like a great deal. However, there are a few caveats. Even though you do not pay tax on the combat-zone pay, you must include it in calculating qualification for the earned income tax credit and the refundable portion of the child tax credit.
Until recently, if you only had tax-free combat-zone pay, you could not fund an Individual Retirement Account, otherwise known as an IRA, because all your pay would have been excluded from gross income. You must have income from work, or “earned income” in order to make an IRA contribution. Since all the combat-zone pay was excluded from gross income, it did not count as earned income either. A rule that had been meant to benefit our military personnel had inadvertently hurt them.
However, a new law was passed and signed on May 26, 2006, which provided that, for purposes of figuring eligibility for contributing to an IRA (or Roth IRA), the combat-zone pay can be considered part of earned income. The Heroes Earned Retirement Opportunities (“HEROs”) Act is effective retroactively for 2004 and 2005. You have until May 28, 2009 to make contributions for those years. Also, if you decide to make a contribution for those years, you can still claim a tax refund resulting from that contribution for up to another year. For tax years 2006 and later, military personnel with combat-zone pay are under the normal rules and deadlines.
Now, our men and women in uniform can save for retirement even while fighting for us in a combat zone. Finally, Congress has passed something for which we can all cheer. If you or a loved one is in a combat zone, such as Iraq or Afghanistan, contact a qualified estate planning attorney to discuss how to plan for retirement and the future in general.

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