Most military members are aware that all or some of their income is tax-free when deployed to qualified combat zone. The IRS calls this the Combat Zone Tax Exclusion (CTZE). But are you aware that you can also qualify for CTZE leave? I wasn’t when I was on Active Duty. In other words, you’ll go on leave after you come back from a deployment and your taxable income will be reduced by your daily “pay rate” times the number of CTZE leave days you have. Here is how it works.
You get 30 days of leave a year. But you actually earn it a 2.5 days per month. If you deploy to a combat zone for 1 day, all of your pay (within limits for officers) for the month will be tax free. Likewise, if you are in a Combat Zone for one day in a month, you’ll get 2.5 days of CTZE leave.
Normally, your leave is counted as first-earned, first-used. This isn’t the case for CTZE leave. If you accrue CTZE leave, it will be the first leave you use when you take leave. Theoretically, DFAS will account for this automatically. But as my favorite President (Ronald Reagan) used to say, “Trust, but verify.” You’ll want to make sure DFAS reduces your income for the days you take CTZE leave.
You also want to make sure you don’t inadvertently “waste” you CTZE leave. If you come home from a deployment and take leave in the month you returned home, you’ll in essence lose the CTZE leave. This is because your pay was already tax-free for the month you were deployed to the Combat Zone. Now…saving a little on taxes may not be the most important thing to you when you get home from a deployment. If you want to take the leave as soon as you get home, go ahead and do it. Just realize the effects of doing so.
Military Finances are Different
Military life is very different than living as a civilian. Military finances are just as different as civilian finances. We think you should work with a Financial Planner or Advisor that works with active and retired military members each and every day. If you like to chat, give us a call or schedule a free initial consultation using the button below.
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