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If you are a member of the U.S. Armed Forces who serves in a combat zone (defined later), you can exclude certain pay from your income. You do not have to receive the pay while you are in a combat zone, are hospitalized, or in the same year you served in a combat zone. However, your entitlement to the pay must have fully accrued in a month during which you served in the combat zone or were hospitalized as a result of wounds, disease, or injury incurred while serving in the combat zone. Enlisted personnel, warrant officers, and commissioned warrant officers can exclude the following amounts from their income. (Other officer personnel are discussed later.)

• Active duty pay earned in any month you served in a combat zone.

• Imminent danger/hostile fire pay.

• A reenlistment bonus if the voluntary extension or reenlistment occurs in a month you served in a combat zone.

• Pay for accrued leave earned in any month you served in a combat zone. The Department of Defense must determine that the unused leave was earned during that period.

• Pay received for duties as a member of the Armed Forces in clubs, messes, post and station theaters, and other nonappropriated fund activities. The pay must be earned in a month you served in a combat zone.

• Awards for suggestions, inventions, or scientific achievements you are entitled to because of a submission you made in a month you served in a combat zone.

• Student loan repayments that are attributable to your period of service in a combat zone (provided a full year’s service is performed to earn the repayment).

Retirement pay and pensions do not qualify for the combat zone exclusion.

Partial (month) service. If you serve in a combat zone for one or more days during a particular month, you are entitled to an exclusion for that entire month.

Above Information Extracted from IRS Publication #3, Armed Forces Tax Guide