The amount of your nontaxable combat pay should be shown on your Form W-2, Box 12, with Code Q.
To enter nontaxable combat pay for Form W-2, Box 12:
- From within your TaxAct® return (Online or Desktop) click the Federal tab. On smaller devices, click in the upper left-hand corner, then choose Federal.
- Click Wages and Salaries to expand the category, then click Wage income reported on Form W-2
- Click Add to enter a new form or Review to review a form already created
- If you use Step-By-Step Guidance, continue to the screen for Box 12. Choose Q-Nontaxable combat pay for the Code and enter the total of your combat pay in the Amount field.
- If you use Quick Entry, enter code Q and the amount for Box 12.
Per IRS Publication 3 Armed Forces' Tax Guide, page 23:
What is included in my earned income for the EIC? For purposes of the earned income credit, earned income includes the following:
- Wages, salaries, tips, and other taxable employee pay.
- Net earnings from self-employment.
- Gross income received as a statutory employee.
- Nontaxable combat pay if you elect to include it in earned income. See Can I treat my nontaxable combat pay as earned income?, next.
Can I treat my nontaxable combat pay as earned income? You can elect to include your nontaxable combat pay in earned income for the earned income credit. If you make the election, you must include in earned income all nontaxable combat pay you received. If you are filing a joint return and both you and your spouse received nontaxable combat pay, you can each make your own election. The amount of your nontaxable combat pay should be shown on your Form W-2 in box 12 with code Q. Electing to include nontaxable combat pay in earned income may increase or decrease your EIC.
What isn't earned income for the EIC? When figuring your earned income for purposes of the earned income credit, don't include any of these amounts.
- Basic pay or special, bonus, or other incentive pay that is subject to the combat zone exclusion (unless you make the nontaxable combat pay election, described earlier in Can I treat my nontaxable combat pay as earned income).
- Basic Allowance for Housing (BAH).
- Basic Allowance for Subsistence (BAS).
- Any other nontaxable employee compensation.
- Interest and dividends.
- Social security and railroad retirement payments.
- Certain workfare payments.
- Pensions or annuities.
- Veterans' benefits (including VA rehabilitation payments).
- Workers' compensation.
- Unemployment compensation.
- Alimony and child support.