Q: Is my civilian pay tax free while I am in a combat zone?
I am in the National Guard, I have been in a combat zone tax exclusion area since may 2016. My civilian employer is still paying me differential pay which is having federal taxes withheld. Is that pay also excluded from federal taxes? How would I indicate that on my return?
A: Under the regulations for the combat pay exclusion (26 CFR 1.112-1(4)) only pay received from the US Armed Forces (or similar entity) can be excluded. The regulations specifically state that pay from private employers, including differential pay, cannot be excluded under the combat pay exclusion.
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