You're not taxed on income you earn as a member of the U.S. armed forces in a combat zone. This applies to active-duty income for any month during which you either:

• Served in a combat zone
• Were hospitalized as a result of wounds, disease, or injury incurred while serving in a combat zone

Enlisted personnel, warrant officers, and commissioned warrant officers of the armed forces aren't taxed on this income under these rules:

• Active-duty pay earned in any month served in a combat zone
• Imminent-danger or hostile-fire pay
• 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 earned in a month you served in a combat zone that you received for duties as a member of the armed forces in:
• Clubs
• Messes
• Post and station theaters
• Other nonappropriated fund activities
• Awards for suggestions, inventions, or scientific achievements you're entitled to because of a submission made in a month you served in a combat zone
• Student-loan repayments if either applies:
• If you served in a combat zone during the entire year of service required to earn the repayment, the entire payment isn't taxed since that year of service is excluded.
• If you served only part of that year in a combat zone, only part of the repayment qualifies for exclusion.

Commissioned officers - If you're a commissioned officer - other than a commissioned warrant officer - you can exclude combat pay according to the rules above.

However, combat pay that can be excluded from taxable income is limited. The pay must be no more than the highest rate of enlisted pay - plus imminent-danger or hostile-fire pay - you received for each month you either:

• Served any time in a combat zone
• Were hospitalized as a result of your service in the combat zone

Retirement pay and pensions don't qualify for the combat zone exclusion.

You don't need to file a special form to claim the exclusion on your return. Your W-2 should accurately report your taxable and tax-free income. If your W-2 is incorrect, contact your pay officer to correct it.

Earned Income Credit (EIC) - Although combat zone pay usually isn't taxable, you might include it in your earned income to qualify for the EIC. If you do this, you won't be taxed on your combat pay. It only allows you to use the combat pay to calculate the EIC amount.

We'll include your combat pay in your EIC calculation if you'll benefit from it.

Child tax credit - Nontaxable combat zone pay is automatically included in the child tax credit.

Active-duty military personnel can deduct unreimbursed, qualified moving expenses if both of these apply:

• They move under military orders.
• The movie is a permanent change-of-duty station.

They can deduct moving expenses without meeting the time and distance requirements usually required. Qualified moving expenses include:

• Costs incurred to move you and your family
• Storage expenses

You can't use reimbursed expenses not included in your income to claim a deduction. Ex: Since the value of moving or storage services the U.S. government provides to armed forces' members isn't taxed, you can't claim a deduction for these expenses.

A permanent change of duty station includes:

• A move from home to the first post of duty when you enlisted or were first called to active duty
• If the move occurs within 1 year of the end of active duty, a move from the last post of duty to home when you:
• Retire
• Are discharged
• Are relieved from active duty
• Go on temporary disability retirement
• A move from 1 permanent post of duty to another permanent post of duty as a different duty station - even if you're separated from the armed forces shortly after the move.

Education benefits paid under any law the Department of Veterans Affairs (VA) administers aren't taxable. You don't need to report them as income.

You must reduce qualified tuition expenses used to claim an education credit or the tuition and fees deduction by any nontaxable VA benefits you receive.

See IRS Publication 970 to learn more.

The Heroes Act of 2008 changed the way that military differential pay is taxed.

Military differential pay is what your civilian employer pays you. It's paid during active military duty in the uniformed services. Military differential pay is the difference between what your employer was paying you and the amount paid to you by the military:

Civilian pay - military pay = military differential pay

Under the Heroes Act, if you're on active duty for more than 30 days, the IRS taxes your military differential pay as wages. So it's subject to Social Security and Medicare withholding. As of 2009, it's reported on Form W-2. (Previously, it was reported on Form 1099-MISC.)

Under the act, differential pay counts as compensation for purposes of retirement plans and IRA contributions. So:

• If you received differential wage payments, you might qualify to contribute to the employer's qualified retirement plan or to an IRA account.
• You can make IRA contributions until the due date for filing your return for the year of the contribution - not including extensions.

You'll usually report disability pensions as income. However, an exception exists for certain military and government disability pensions.

You can exclude pensions - and similar amounts - you receive for personal injury or sickness that's the result of active service in any country's armed forces. You can do so if you meet at least 1 of these requirements:

• You were entitled to the pension funds on or before Sept. 24, 1975.
• You were a member of any armed forces or reserve component on Sept. 24, 1975, under a binding commitment.
• You receive the benefit due to a combat-related injury.
• You're entitled to receive disability compensation from the Department of Veterans' Affairs (VA).

You can exclude disability pay from your regular military retirement pay when:

• You've met 1 of the above requirements.
• You've retired on account of disability.

If you receive a pension based on your years of service, you can exclude an amount equal to:

• Pension you would've received had you received a pension based on your disability
• Amount of VA benefits you would've received had you received a pension based on your disability

You might be able to amend a prior-year return and get a refund if:

• You received a retroactive determination of disability for a prior year from the VA.
• You reported prior taxable income that has to be repaid - or subtracted from - your current disability pay.

You're taxed on Social Security disability payments as you are on regular Social Security income. Unlike military pensions and VA benefits, you can't exclude the payments from tax based on a combat-related injury.

See IRS Publication 915 to learn more.

If you're a qualified reservist called to active duty for at least 180 days, the additional 10% tax on early distributions from retirement plans doesn't apply to your distributions. However, the distributions are still subject to income tax.

You can also recontribute the qualified reservist distribution to an IRA within 2 years after your active-duty period. A distribution is qualified if you meet these requirements:

• You were on active duty for at least 180 days as a member of a reserve component, including:
• Army National Guard
• Army Reserve
• Naval Reserve
• Marine Corps Reserve
• Air National Guard
• Air Force Reserve
• Coast Guard Reserve
• Reserve Corps of the Public Health Service
• Distribution was from any of these:
• An IRA
• Contributions you made to a:
• 401(k) plan
• 403(b) annuity
• Similar plan
• Distribution wasn't taken before you were called to active duty.
• Distribution wasn't taken after the close of your active duty period.

If you filed a return for a prior year and paid the penalty on a distribution that qualified for this exception, file an amended return to get a refund.

If you sell your main home, you can usually exclude up to $250,000 of profit - $500,000, if married filing jointly. To do so,you must meet these tests:

• Ownership test - you owned the home for at least 2 years on the date of the sale.
• Use test - you lived in the home as your main home for at least 2 of the last 5 years, ending on the date of the sale.

If you don't meet the 2-year use test because you were stationed away from your home during qualified official extended duty, the 5-year test can be suspended for up to 10 years and no longer.

Ex: Scott was stationed away from home on active duty for 8 years as of 2010. If he lived in his home 2 out of 5 years from 1997-2002, he meets the use test.

However, Brian was stationed away from home on active duty for 12 years as of 2010. He must have lived in his home 2 out of 5 years from 1995-2000, not starting at 1993, to meet the use test.

Qualified official extended duty is either:

• Duty performed at a duty station at least 50 miles from the disposed residence
• Duty performed while living in government quarters under government orders

Duty is defined as extended duty when you're called or ordered to active duty for a period that either exceeds 90 days or is indefinite.

See IRS Publication 523 to learn more.

You can still use combat pay that isn't taxed to make a traditional or Roth IRA contribution if you meet the other qualifications.

Consider making a Roth IRA contribution if both of these apply:

• Most of your income is nontaxable combat pay
• You wouldn't benefit from contributing to a deductible IRA.

See IRS Publication 590 to learn more.

Beneficiaries can roll over military death gratuities and Servicemembers' Group Life Insurance program payments into a:

• Roth IRA
• Coverdell education savings account (ESA)

To qualify, you must roll over the amounts to the Roth IRA or contribute it to the ESA within 1 year of receipt.

Unlike conventional rollovers, you can make the rollover no matter your income level or the total amount you contribute.

You can use health flexible spending accounts (FSAs) to pay medical expenses with pre-tax income.

The Heroes Act of 2008 changed the use-it-or-lose-it rule for reservists called to active duty. The act affects distributions taken from an FSA on or after June 18, 2008. If you qualify, you can take a distribution from your FSA even if you don't use the amount to pay for medical expenses. That way, you don't have to lose the unused funds in your account at the end of the year.

To qualify for a distribution from a health FSA under this special rule, both of these must apply:

• You're a member of a reserve component ordered or called to active duty for at least 180 days or for an indefinite period.
• You must make the distribution between the date you were called to active duty and the last date that reimbursement from your FSA could otherwise be received for the year.

Only plans that have adopted this optional provision can provide this benefit. Check with your employer or FSA plan administrator to find out if your plan allows this special provision.