Bahrain's Tax Combat Zone Status: What's The Verdict?

Military personnel serving in combat zones are eligible for certain tax benefits. The U.S. Internal Revenue Service (IRS) defines a combat zone as an area designated by the President through an executive order, where the U.S. Armed Forces are engaging in or have engaged in combat. Military pay earned while serving in these zones may be exempt from federal income taxes and other special tax rules may apply. Bahrain was designated as a combat zone by Executive Order No. 12744, along with other areas in the Arabian Peninsula, with effect from January 17, 1991. This article will explore the tax implications for those serving in Bahrain and other designated combat zones.

Bahrain's designation as a combat zone

The designation of Bahrain as a combat zone is significant for tax purposes, particularly for military personnel serving in the region. Under US tax laws, military members serving in combat zones can exclude certain types of pay from their taxable income. This includes active-duty pay, imminent danger/hostile fire pay, reenlistment bonuses, and pay for selling back leave. The rationale behind these tax benefits is to compensate for the inherent risks and challenges associated with serving in a combat zone.

It is important to note that the criteria for qualifying for combat-related tax benefits are outlined by the Internal Revenue Service (IRS) in the US. The IRS defines a combat zone as an area designated by the President through an executive order, where the US Armed Forces are engaging or have engaged in combat. This definition is crucial in determining the tax status of a particular region.

In addition to Bahrain, other countries in the Arabian Peninsula area, such as Jordan and Lebanon, have also been certified for combat zone tax benefits due to their direct support of military operations. This highlights the complex nature of tax regulations in regions impacted by conflict.

Tax benefits for US military in combat zones

Military personnel deployed in combat zones can take advantage of tax-free pay benefits. These tax advantages can have a significant impact on their long-term financial goals.

Who Qualifies for Tax Benefits?

To qualify for combat-related tax benefits, you must be a member of the United States Armed Forces and meet one of the following criteria:

• Serve in an active combat area designated by Executive Order and receive special pay for duty subject to hostile fire or imminent danger as certified by the Department of Defense.
• Serve in a support area designated by the Department of Defense in direct sustainment of military operations in the combat zone and receive special pay for duty subject to hostile fire or imminent danger.
• Serve in a statutorily designated Qualified Hazardous Duty Area and receive special pay for duty subject to hostile fire or imminent danger as certified by the Department of Defense.

The following areas are currently recognised as combat zones:

• Afghanistan and its airspace (as of September 19, 2001)
• The Sinai Peninsula (as of December 2017)
• The Federal Republic of Yugoslavia (Serbia/Montenegro) and the Ionian Sea north of the 39th parallel (as of March 24, 1999)
• The Arabian Peninsula, including the northern part of the Arabian Sea and the total land areas of Bahrain, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (as of January 17, 1991)

If you qualify for combat-related tax benefits, you can exclude the following types of income from taxation:

• Basic pay for every month you are present in a combat zone
• Reenlistment or continuation bonuses if the reenlistment occurred while in a combat zone
• School loan repayments for the portion of the year you were present in a combat zone
• Imminent danger/hostile fire pay
• Leave benefits, including income from selling accrued leave earned while in a combat zone
• Awards and other financial incentives for submissions made while in a combat zone

It is important to note that military pay earned in a combat zone is still subject to Social Security and Medicare taxes. Additionally, each state has its own rules regarding the taxation of military pay, so it is essential to check with your state tax agency for specific information.

Tax-free combat pay

Military personnel serving in a combat zone can exclude portions of their pay from their taxable income. This is known as the combat pay tax exclusion.

Who Qualifies for Tax-Free Combat Pay?

To qualify for tax-free combat pay, you must be a member of the United States Armed Forces. You must have served in a designated combat zone or have been hospitalized as a result of wounds, disease, or injury incurred while serving in a designated combat zone.

The following types of income can be excluded from taxation:

• Basic pay for every month served in a combat zone
• Reenlistment or continuation bonuses if reenlistment occurred while in a combat zone
• School loan repayments for the portion of the year served in a combat zone
• Imminent danger/hostile fire pay
• Leave benefits, such as income from selling accrued leave earned while in a combat zone
• Awards and other financial incentives for submissions made while in a combat zone

Yes, there are limits to the exclusion based on military rank:

• Enlisted members, warrant officers, and commissioned warrant officers can exclude all military pay for each month present in a combat zone.
• Commissioned officers are limited to the highest rate of enlisted pay plus imminent danger/hostile fire pay for each month present in a combat zone.

Military pay earned while in a combat zone is generally excluded from federal income tax. However, it is still subject to Social Security and Medicare taxes. It's important to note that states have their own rules for taxing combat pay, so it's recommended to check with your state tax agency for specific information.

As of 2021, the United States has recognized four active combat zones for tax benefits:

• Sinai Peninsula
• Afghanistan area
• Kosovo area
• Arabian Peninsula area

Qualifying for tax-exempt combat pay

To qualify for tax-exempt combat pay, you must be a member of the United States Armed Forces and have served in a designated combat zone. The IRS defines a combat zone as any area designated by the President through an executive order as a region where the Armed Forces are engaging in or have engaged in combat.

• Service in a Combat Zone: This includes any periods of absence from duty due to illness, wounds, or leave. It also includes situations where service members become prisoners of war or are missing in action, as long as that status is maintained for military pay purposes.
• Income Exclusions: You can exclude certain types of income from taxation if they are earned in a qualified combat zone. This includes active-duty pay, imminent danger/hostile fire pay, re-enlistment bonuses, pay for selling back leave, and other financial incentives.
• Partial Month Service: If you serve in a combat zone for even one day during a month, you are eligible for the combat zone exclusion for that entire month.
• Hospitalization: If you are hospitalized due to wounds, disease, or injury incurred while serving in a combat zone, you can exclude that income from taxation, regardless of whether the hospitalization occurs inside or outside the combat zone.
• Direct Support Areas: Some areas outside of designated combat zones are considered direct support areas. Personnel in these areas assist with military operations in the combat zone and may qualify for the combat zone tax exclusion if they receive special pay for duty subject to hostile fire or imminent danger.
• Combat Zone Designation: The President designates the dates when an area becomes a combat zone or ceases to be one through executive orders.
• Non-qualifying Presence: Presence in a combat zone during leave from a duty station outside the zone, passing through the zone during travel, or presence for personal convenience does not qualify as service in a combat zone.

It is important to note that while combat pay may be tax-exempt, it is still subject to Social Security and Medicare taxes. Additionally, each state has different rules regarding whether the federal combat pay tax exclusion applies to state income taxes.

Combat zone compensation

A combat zone is an area designated by the President of the United States through an Executive Order as a region in which the Armed Forces are engaging or have engaged in combat. The dates on which an area becomes a combat zone and ceases to be one are also decided by the President through an Executive Order.

Who Qualifies for Combat Zone Compensation?

Members of the Armed Forces who serve in a combat zone can exclude portions of their pay from their taxable income. This includes enlisted personnel, warrant officers, and commissioned warrant officers.

• Active-duty pay earned in any month served in a combat zone
• Imminent danger/hostile fire pay
• A reenlistment bonus if you reenlisted in a month you served in a combat zone
• Pay for selling back leave in any month you served in a combat zone
• Some other pay received in a combat zone

The amount of pay subject to the combat zone tax exclusion each month for O-1 and above is limited to the monthly basic pay for the senior E-9 of each branch plus the monthly hostile fire pay amount. For 2020, this amount was $8,747.50.

Partial Month Service in a Combat Zone

If you serve in a combat zone for at least one day during a month, you get the combat zone exclusion for the whole month.

Hospitalization While Serving in a Combat Zone

If you are hospitalized while serving in the combat zone, the wound, disease, or injury causing the hospitalization will be presumed to have been incurred while serving in the combat zone unless there is clear evidence to the contrary.

Non-Qualifying Presence in a Combat Zone

The following military service does not qualify as service in a combat zone:

• Presence in a combat zone while on leave from a duty station located outside the combat zone
• Passage over or through a combat zone during a trip between two points that are outside a combat zone
• Presence in a combat zone solely for your personal convenience

Direct Support Areas

Some areas outside of combat zones are designated direct support areas. Personnel in these areas maintain, uphold and assist those involved in military operations in a designated combat zone. To qualify for a combat zone tax exclusion, they must also be qualified to receive either hostile fire pay or imminent danger pay.

Frequently asked questions