Combat zones are areas designated by the U.S. President by Executive Order as an area in which U.S. Armed Forces are engaging in or have engaged in combat.
Service outside a combat zone is considered to be inside a combat zone if the service is in direct support of combat zone military operations.
Service outside a hazardous duty area for support of operations in a hazardous duty area is treated as serving in a combat zone only for the purpose of getting an extension deadline.

Income listed below, received during service in a combat zone doesn’t have to be reported as gross income:
Active duty pay earned in any month served in a combat zone
Imminent danger/hostile fire pay during a month served in a combat zone
Re-enlistment bonus if re-enlistment or voluntary extension occurs during a month served in a combat zone
Pay for accrued leave — the department of defense must determine the unused leave was earned during the month served in a combat zone
Pay for duties as a member of the Armed Forces in clubs, messes, post and station theaters, and other non-appropriated fund activities earned during a month served in a combat zone
Awards or achievement pay made for a suggestion or achievement made in a month served in a combat zone
Student loan repayments if the entire year of service required to earn the repayment was performed in a combat zone

If you're a commissioned officer (other than a commissioned warrant officer), the combat pay exclusion for any month is limited to the highest rate on enlisted pay (plus hostile fire/imminent danger pay, if any).

You do not claim an exclusion for combat pay on your tax return.

If you served in a combat zone for 1 or more days during a particular month, you’re allowed the above exclusions for that entire month. Combat zone service includes any periods you are absent from duty due to illness, wounds or leave. A person is considered to be serving in a combat zone if he or she becomes a prisoner of war or is missing in action if that status is kept for military pay purposes.

You can also exclude military pay earned while hospitalized (you don’t have to be hospitalized in the combat zone). Your hospitalization must be due to having served in a combat zone. This is true even if you’re hospitalized after combat zone service.

Combat Zone Considerations
Military service outside the combat zone is, for tax purposes, considered to be inside a combat zone if the service is in direct support of combat zone military operations and the service qualifies you for special military pay for duty subject to hostile fire or imminent danger.

Situations not considered to be in a combat zone:
You’re present in a combat zone during leave from a duty station located outside the combat zone.
You pass over or through a combat zone during a trip between 2 points which are outside a combat zone.
You’re in a combat zone only for your personal convenience.

Hazardous Duty Areas
Members of the Armed Forces who serve outside a hazardous duty area in support of operations in a hazardous duty area are treated as serving in a combat zone only for the purpose of getting an extension. Meeting additional requirements may entitle you to full combat zone tax benefits.

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