Question: Mark is serving in the military on active duty in a combat zone. He has received $50,000 of qualified nontaxable combat pay and plans to contribute to an individual retirement account (IRA). Although the combat pay is nontaxable, must he include it as compensation when determining the compensation-based limitations of his contribution to the IRA?
Answer: Yes. Although qualified combat pay is excluded from income under §112, for purposes of determining the compensation-based limit on contributions to an IRA under §219(b)(1)(B), the nontaxable combat pay is included in compensation. Therefore, a military taxpayer’s IRA contribution is the lesser of the dollar limit for an IRA deduction for the tax year, or the amount of combat pay excluded from income under §112 plus taxable compensation for the tax year.
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Information included in this article is accurate as of the publish date. This post is not reflective of tax law changes or IRS guidance that may have occurred after the date of publishing. All taxpayer circumstances are different, and NATP recommends contacting research services if you have specific questions about your clients’ tax situations.