This section discusses the special tax provisions that apply to individuals who:
- Die while serving in a combat zone or from wounds, disease, or injury incurred while serving in a combat zone, or
- Die from wounds or injury incurred in a terrorist or military action while a U.S. employee.
Combat Zone Tax Forgiveness
If a member of the U.S. Armed Forces dies while in active service in a combat zone or from wounds, disease, or other injury received in a combat zone, the decedent’s income tax liability is forgiven for the tax year in which death occurred and for any earlier tax year ending on or after the first day the member served in a combat zone in active service. (Forgiven tax is tax that does not have to be paid.) Any forgiven tax liability that has already been paid will be refunded, and any unpaid tax liability at the date of death will be forgiven.
In addition, any unpaid taxes for prior years will be forgiven and any prior year taxes paid after the date of death will be refunded.
This provision also applies to a member of the Armed Forces serving outside the combat zone if the service:
- Was in direct support of military operations in the zone, and
- Qualified the member for special military pay for duty subject to hostile fire or imminent danger.
Missing status. The date of death for a member of the Armed Forces who was in a missing status (missing in action or prisoner of war) is the date his or her name is removed from missing status for military pay purposes. This is true even if death actually occurred earlier.
Terrorist or Military Action Tax Forgiveness
Tax liability is forgiven for an individual who:
1) Is a military or civilian U.S. employee at death, and
2) Dies from wounds or injury incurred while a U.S. employee in a terrorist or military action.
Tip: Beginning in 2001, tax liability is forgiven for an individual who dies from wounds or injury incurred while a U.S. employee in a terrorist or military action regardless of where the terrorist or military action occurred.
The forgiveness applies to the tax year death occurred and for any earlier tax year beginning with the year before the year in which the wounds or injury occurred. A terrorist or military action is any terrorist activity primarily directed against the United States or its allies or any military action involving the U.S. Armed Forces resulting from violence or aggression against the United States or its allies.
Any multinational force in which the United States participates is considered an ally of the United States.
Example. Army Private John Kane died in 2003 of wounds incurred in a terrorist attack in 2002. His income tax liability is forgiven for all tax years from 2001 through 2003. Refunds are allowed for the tax years for which the period for filing a claim for refund has not ended.
Claims for Tax Forgiveness
If the tax-forgiveness provisions apply to a prior year’s tax that has been paid and the period for filing a refund claim has not ended, the tax will be refunded. If any tax is still due, it will be canceled. Generally, the period for filing a claim for credit or refund of income tax is 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever is later. If death occurred in a combat zone or from wounds, disease, or injury incurred in a combat zone, the deadline for filing a claim for credit or refund is extended using the rules discussed later under Extension of Deadline.
Procedures for claiming forgiveness. If the individual died in a combat zone or as a result of a terrorist or military action, use the following procedures for filing a claim for income tax forgiveness.
- File Form 1040 if a tax return has not been filed for the tax year. Form W–2 must accompany the return.
- File Form 1040X if a tax return has been filed. A separate Form 1040X must be filed for each year in question.
