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The Department of Defense's (DOD) total military compensation package for active duty members consists of both cash and noncash benefits. Since the late 1990s, Congress and the DOD have increased military cash compensation by increasing basic pay and allowances for housing, among other things. Military members also receive tax breaks, which are a part of their cash compensation. Moreover, active duty personnel are offered substantial noncash benefits, such as retirement, health care, commissaries, and childcare. In some cases, these noncash benefits exceed those available to private-sector personnel. DOD relies heavily on noncash benefits because it views benefits as critical to morale, retention, and the quality of life for service members and their families. To better understand the military compensation system, Congress asked us to provide the Chairman and Ranking Minority Member of the Senate Committee on Finance with information on active duty military compensation and its tax treatment. In January 2004, we briefed Congressional staff on our preliminary observations. Because our work identified that the combat zone tax exclusion could impact some service members, Congress asked us to focus our work on military cash compensation and to do additional work to estimate the effect of the combat zone tax exclusion on service members' compensation. We provided Congress subsequent briefings that estimated the effect of the combat zone exclusion. As requested, we have updated and combined the briefings for this report to (1) summarize active duty cash compensation and describe how military compensation varies at different career points for officers and enlisted members; (2) explain how military pay is taxed and any special tax treatment of military compensation; (3) estimate the effects of interactions between the combat zone exclusion and certain tax credits on military members' compensation; and (4) describe the benefits DOD provides active duty members as well as specific programs available to members that encourage wealth building.

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Matter for Congressional Consideration

Matter Status Comments
If the Congress wishes to remedy the unintended tax consequences associated with the combat zone exclusion, it may want to consider revising the rules of the Earned Income Tax Credit and the Additional Child Tax Credit with respect to income earned in a combat zone.
Closed - Implemented
On October 4, 2004, the President signed the Working Families Tax Relief Act of 2004 (P.L 108-311) into law. The act included legislation to include combat pay for purposes of calculating the Earned Income Tax Credit.

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