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Combat Pay and Other Untaxed Income

Combat Pay and Other Untaxed Income

Find out what's taxable and untaxable income.

April 21, 2009

This page discusses the reporting of combat pay, housing allowances and substistence allowances on the Free Application for Federal Student Aid (FAFSA). It also mentions other pitfalls encountered by veterans, such as confusing aspects of the W-2 statement.

Combat pay, although excluded from gross income, is still considered during the need analysis for federal student aid purposes. It is reported as untaxed income on Worksheet B of the FAFSA. It should also be included in the earned income figures reported on the FAFSA. The amount of combat pay is listed in Box 12 (Q) of the W-2 statement. Sometimes they will list this information in Box 14, which is an “Other” box. (Note that if no income tax return was filed, combat pay should only be included in the earned income figures, as income earned from work is used instead of AGI when the applicant is not a tax filer. In such a situation, including the combat pay in both earned income and Worksheet B would lead to double-counting of the combat pay.)

Other types of untaxed income received by military personnel that should be reported on Worksheet B include housing allowance (BAQ) and subsistence allowance (BAS). The school may ask for a copy of your most recent Leave and Earning Statement (LES) to help clarify the type of pay and the amounts.

Do not use the Social Security Administration (SSA) Wages, which is listed with a code W in the W-2 statement.

Do not include on Worksheet B any amounts that were already included in AGI, as that will result in the income being double-counted.

If the untaxed income is not reflective of income during the award year (i.e., because you are no longer serving on active duty), you should ask the school to use “professional judgment” to exclude the amounts from income. Schools have a lot of flexibility in making such adjustments under the HEROES Act.

Note that since Worksheet B income is not included in AGI, you might still qualify for automatic zero EFC or the simplified needs test, as they trigger off of AGI and not total income. For example, if you have no income other than combat pay and housing/subsistence allowances, you will probably qualify for automatic zero EFC.

The MyPay web site can be helpful in understanding military pay issues.

This article originally appeared on FinAid.org.


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