35.6 Tax Forgiveness for Combat Zone or Terrorist or Military Action Deaths

If a member of the Armed Forces is killed in a combat zone or dies from wounds or disease incurred while actively serving in a combat zone, any income tax liability for the year of death and any earlier year in which he or she actively served in a combat zone is waived. In addition, the service member’s estate is entitled to a refund for income tax paid while serving there.

If a member of the Armed Forces was a resident of a community property state and his or her spouse reported half of the military pay on a separate return, the spouse may get a refund of taxes paid on his or her share of the combat zone pay.

Forgiveness benefits apply to an Armed Forces member serving outside the zone if service: (1) was in direct support of military operations there, and (2) 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 occurred earlier.

Caution

Training Exercises

Tax forgiveness for personnel killed in a “military action” does not apply to a U.S. civilian or military employee who dies as a result of a training exercise.

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Tax forgiveness for civilian or military personnel killed in terroristic or military action.

Tax liability is waived for civilian or military U.S. government employees killed in terroristic or military actions, even if the President has not designated the area as a combat zone. The individual must be a U.S. government employee both on the date of injury and date of death. Tax liability is waived for the period beginning with the taxable year before the year in which the injuries were incurred and ending with the year of death. Refund claims for prior years must generally be filed on Form 1040X by the later of three years from the time the original return was filed or two years from the time the tax was paid. However, if death occurred in a combat zone, the filing period is extended by the time served in the combat zone, plus the period of continuous hospitalization outside the U.S., plus an additional 180 days.

How tax forgiveness is claimed.

If the individual died in a combat zone or in a terroristic or military action, you file as the individual’s representative: (1) Form 1040 if a U.S. individual income tax return (Form 1040, 1040A, or 1040EZ) has not been filed for the tax year. Form W-2, Wage and Tax Statement, must accompany the return. (2) Form 1040X if a U.S. individual income tax return has been filed. A separate Form 1040X must be filed for each year in question. See IRS Publication 3 for how to identify the military or terrorist action in which the death occurred.

An attachment should accompany any return or claim and should include a computation of the decedent’s tax liability before any amount is forgiven and the amount that is to be forgiven.

The following documents must also accompany all returns and claims for refund: (1) Form 1310, Statement of Person Claiming Refund Due a Deceased Taxpayer; and (2) a certification from the Department of Defense. Department of State certification is required if the decedent was a civilian employee of an agency other than the Department of Defense. See IRS Publication 3 for the IRS address where the tax forgiveness claim and documents must be filed.