| The IRS states that not all combat pay is exempt from taxation!
Most combat veterans have the notion that all pay received while serving in a combat zone is free of tax. This is not the case, in fact the IRS states, that "the combat pay must be acquired during combat zone service."
In addition, the IRS states that "a soldier who reenlists while serving outside of a combat zone canʼt exclude the reenlistment bonus if itʼs paid while he or she is in a combat zone. Furthermore, "the bonus is tax free only if the election is effective while the soldier is in a combat zone."
It is also worth noting that the "taxable bonuses are subject to a flat 25% income tax withholding rate".
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