Important Changes

Standard mileage rate.   The standard mileage rate for the cost of operating your car increased to 36.5 cents a mile for all business miles driven. The standard mileage rate for operating your car to get medical care or to move increased to 13 cents a mile.

Earned income credit.   The maximum amount of income you can earn and still get the earned income credit has increased. You may be able to take the credit if you earned less than $33,178 ($34,178 for married filing jointly) if you have two or more qualifying children; $29,201 ($30,201 for married filing jointly) if you have one qualifying child; and, $11,060 ($12,060 for married filing jointly) if you do not have any qualifying children. See Earned Income Credit, later.

Exemption amount.   You are allowed a $3,000 deduction for each exemption to which you are entitled.

Traditional individual retirement arrangement (IRA).   Generally, if you have a traditional individual retirement arrangement and are covered under an employer retirement plan, the amount of income you can have in 2002 and still claim a deduction for a contribution to a traditional IRA is increased in most cases. The amounts vary depending on filing status. For more information, see Publication 590, Individual Retirement Arrangements (IRAs).

Education benefits.   The following benefits are specifically for education expenses. For more information on all of the following benefits, see Publication 970, Tax Benefits for Education.

Tuition and fees deduction (new deduction in 2002 for higher education expenses). You may be able to deduct qualified tuition and related expenses paid during the year for yourself, your spouse, or a dependent, even if you do not itemize deductions on Schedule A, Form 1040.

Interest on student loans. You may be able to deduct as an adjustment to income interest paid on a qualified student loan. The maximum deduction is $2,500.

Hope credit. You may be able to claim a tax credit of up to $1,500 for each eligible student. A Hope credit can be claimed in the same year the beneficiary takes a tax-free distribution from a Coverdell ESA (discussed later), as long as the same expenses are not used for both benefits.

Lifetime learning credit. For qualified tuition and related expenses paid during the tax year, you may be able to claim a tax credit of up to $1,000 for all students. A lifetime learning credit can be claimed in the same year the beneficiary takes a tax-free distribution from a Coverdell ESA (discussed next), as long as the same expenses are not used for both benefits.

Coverdell ESAs (formerly education IRAs). Coverdell education savings accounts (ESAs) are not individual retirement arrangements. A designated beneficiary may take withdrawals from both a Coverdell ESA and a QTP (discussed next) in the same year, but if the total withdrawn is more than the beneficiary's remaining qualified expenses, those expenses must be allocated between the withdrawal from the Coverdell ESA and the withdrawal from the QTP before figuring how much of each withdrawal is taxable.

Qualified tuition programs (QTPs). Qualified state tuition programs (QSTPs) have been renamed qualified tuition programs (QTPs). A QTP (also known as a 529 plan or a section 529 plan) is a program set up to allow you to either prepay a student's tuition or contribute to a college savings account established for paying a student's qualified higher education expenses at an eligible educational institution. A designated beneficiary may take withdrawals from both a QTP and a Coverdell ESA in the same year, but if the total withdrawn is more than the beneficiary's remaining qualified expenses, those expenses must be allocated between the withdrawal from the QTP and the withdrawal from the Coverdell ESA before figuring how much of each withdrawal is taxable.

Employer-provided educational assistance. The tax-free status of up to $5,250 of employer-provided educational assistance benefits each year was scheduled to end for courses beginning after December 31, 2001. This benefit has been extended and, beginning in 2002, also applies to graduate-level courses.

Important Reminders

Tax relief for victims of terrorist or military action.   The Victims of Terrorism Tax Relief Act of 2001 provided tax relief to those injured or killed in the April 19, 1995 (Oklahoma City), September 11, 2001, or certain anthrax attacks. The Act also provides relief to survivors of those killed in the attacks and others who were affected by those attacks. It includes:

• Forgiveness of federal tax liability for those who died as a result of the attacks.
• A reduction in the estate tax of those who died as a result of the attacks.
• Tax-free treatment of qualified disaster relief payments, certain disability income, certain death benefits, and certain cancellation of indebtedness.

For more information on these relief provisions and methods for claiming tax refunds, see Publication 3920, Tax Relief for Victims of Terrorist Attacks.

Afghanistan designated a combat zone.   By Executive Order No. 13239, Afghanistan (and airspace above) is designated as a combat zone beginning September 19, 2001.

Third party designee.   You can check the Yes box in the Third Party Designee area of your return to authorize the IRS to discuss your return with a friend, family member, or any other person you choose. This allows the IRS to call the person you identified as your designee to answer any questions that may arise during the processing of your tax return. It also allows your designee to perform certain actions. See the income tax package for details.

Parent of a kidnapped child.   The parent of a child who is presumed by law enforcement authorities to have been kidnapped by someone who is not a family member may be able to take that child into account in determining his or her eligibility for the following.

• Head of household or qualifying widow(er) with dependent child filing status.
• Exemption for dependents.
• Child tax credit.
• Earned income credit.

For more information, see Publication 501, Exemptions, Standard Deduction, and Filing Information.

Child tax credit.   The maximum child tax credit you can claim for each qualifying child is $600. The qualifications for claiming the additional child tax credit have been changed to include a qualifying individual with fewer than 3 children. See Child Tax Credit, later.

Payments to Holocaust victims.   Restitution payments received after 1999 (and certain interest earned on the payments) are not taxable and do not affect the taxability of certain benefits, such as social security benefits. You may have to file Form 1040X if you included these amounts in income on your 2000 or 2001 tax return or if you used the payments in any computation affecting your tax liability.

Extension of time to file.   You can get an automatic 4-month extension if, by April 15, 2003, you do one of the following.

1. File Form 4868.
2. Pay part or all of the tax you expect to owe for 2002 electronically.
   1. By credit card.
   2. By authorizing an electronic funds withdrawal from your checking or savings account.

For details, see Form 4868.

Photographs of missing children.   The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child.

Introduction

This publication covers the special tax situations of active members of the U.S. Armed Forces. It does not cover military pensions or veterans' benefits or give the basic tax rules that apply to all taxpayers. For information on military pensions or veterans' benefits, see Publication 525, Taxable and Nontaxable Income. If you need the basic tax rules or information on another subject not covered here, you can check our other free publications. See Publication 910, IRS Guide to Free Tax Services, for summaries on different tax publications.

For federal tax purposes, the U.S. Armed Forces includes commissioned officers and enlisted personnel in all regular and reserve units under control of the Secretaries of the Defense, Army, Navy, and Air Force. The Armed Forces also includes the Coast Guard. It does not include members of the U.S. Merchant Marine or the American Red Cross.

Members serving in an area designated or treated as a combat zone are granted special tax benefits. In the event an area ceases to be a combat zone (by Presidential Executive Order or by statute), the IRS will do its best to notify you. Many of the relief provisions will end at that time.

Members serving in a qualified hazardous duty area designated by statute are afforded the same benefits as members serving in a combat zone designated by Executive Order.

Comments and suggestions.   We welcome your comments about this publication and your suggestions for future editions.

You can e-mail us while visiting our web site at www.irs.gov.

You can write to us at the following address:

Internal Revenue Service
Tax Forms and Publications
W:CAR:MP:FP
1111 Constitution Ave. NW
Washington, DC 20224

We respond to many letters by telephone. Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence.

Useful Items You may want to see:

Publication

• 54   Tax Guide for U.S. Citizens and Resident Aliens Abroad
• 463   Travel, Entertainment, Gift, and Car Expenses
• 501   Exemptions, Standard Deduction, and Filing Information
• 503   Child and Dependent Care Expenses
• 505   Tax Withholding and Estimated Tax
• 508   Tax Benefits for Work-Related Education
• 516   U.S. Government Civilian Employees Stationed Abroad
• 519   U.S. Tax Guide for Aliens
• 521   Moving Expenses
• 523   Selling Your Home
• 525   Taxable and Nontaxable Income
• 527   Residential Rental Property
• 529   Miscellaneous Deductions
• 553   Highlights of 2002 Tax Changes
• 559   Survivors, Executors, and Administrators
• 590   Individual Retirement Arrangements (IRAs)
• 596   Earned Income Credit (EIC)
• 970   Tax Benefits for Education
• 3920   Tax Relief for Victims of Terrorist Attacks

Form (and Instructions)

• 1040X   Amended U.S. Individual Income Tax Return
• 1310   Statement of Person Claiming Refund Due a Deceased Taxpayer
• 2119   Sale of Your Home
• 2688   Application for Additional Extension of Time To File U.S. Individual Income Tax Return
• 2848   Power of Attorney and Declaration of Representative
• 3903   Moving Expenses
• 4868   Application for Automatic Extension of Time To File U.S. Individual Income Tax Return
• 8822   Change of Address
• 9465   Installment Agreement Request

See How To Get Tax Help, near the end of this publication, for information about getting IRS publications and forms.

Gross Income

Members of the Armed Forces receive many different types of pay and allowances. Some are included in gross income while others are excluded from gross income. Included items are subject to tax and must be reported on your tax return. Excluded items are not subject to tax, but may have to be shown on your tax return.

For information on the exclusion of pay for service in a combat zone and other tax benefits for combat zone participants, see Combat Zone Exclusion and Extension of Deadline, later.

Included Items

These items are included in gross income, unless the pay is for service in a combat zone.

Basic pay	· Active duty
	· Attendance at a designated service school
	· Back wages
	· Drills
	· Reserve training
	· Training duty
Special pay	· Aviation career incentives
	· Diving duty
	· Foreign duty (outside the 48 contiguous states and the District of Columbia)
	· Hazardous duty
	· Hostile fire or Imminent danger
	· Medical and dental officers
	· Nuclear-qualified officers
	· Special duty assignment pay
Bonuses	· Enlistment
	· Reenlistment
Other payments	· Accrued leave
	· Personal money allowances paid to high-ranking officers
	· Student loan repayment from programs such as the Department of Defense Educational Loan Repayment Program when year's service (requirement) is not attributable to a combat zone.

Excluded Items

The exclusion for certain items applies whether the item is furnished in kind or is a reimbursement or allowance. There is no exclusion for the personal use of a government-provided vehicle.

Special Pay	· Compensation for active service while in a combat zone or a qualified hazardous duty area. Note: Limited amount for officers.
Living allowances	· BAH (Basic Allowance for Housing) You can deduct mortgage interest and real estate taxes on your home even if you pay these expenses with your BAH.
	· BAS (Basic Allowance for Subsistence)
	· Housing and cost-of-living allowances abroad whether paid by the U.S. Government or by a foreign government.
	· OHA (Overseas Housing Allowance)
Family allowances	· Certain educational expenses for dependents
	· Emergencies
	· Evacuation to a place of safety
	· Separation
Death allowances	· Burial services
	· Death gratuity payments (up to $3,000) to eligible survivors
	· Travel of dependents to burial site
Moving allowances	· Dislocation
	· Move-in housing
	· Moving household and personal items
	· Moving trailers or mobile homes
	· Storage
	· Temporary lodging and temporary lodging expenses
Travel allowances	· Annual round trip for dependent students
	· Leave between consecutive overseas tours
	· Reassignment in a dependent restricted status
	· Transportation for you or your dependents during ship overhaul or inactivation
	· Per diem
Other payments	· Defense counseling
	· Disability, including payments received for injuries incurred as a direct result of a terrorist or military action
	· Group-term life insurance
	· Professional education
	· ROTC educational and subsistence allowances
	· Survivor and retirement protection plan premiums
	· Uniform allowances
	· Uniforms furnished to enlisted personnel
In-kind military benefits	· Legal assistance · Medical/dental care
	· Commissary/exchange discounts
	· Space-available travel on government aircraft

Foreign Source Income

If you are a U.S. citizen with income from sources outside the United States (foreign income), you must report all of that income on your tax return unless it is exempt by U.S. law. This is true whether you reside inside or outside the United States and whether or not you receive a Form W-2, Wage and Tax Statement, or a Form 1099 statement from the foreign payor. This applies to earned income (such as wages and tips) as well as unearned income (such as interest, dividends, capital gains, pensions, rents, and royalties).

Certain taxpayers can exclude income earned in foreign countries. For 2002, this exclusion amount is $80,000. However, the foreign earned income exclusion does not apply to the wages and salaries of military and civilian employees of the U.S. Government. Employees of the U.S. Government include those who work at Armed Forces post exchanges, officers' and enlisted personnel clubs, and embassy commissaries, and similar personnel paid from nonappropriated funds. Other foreign income earned by military personnel or their spouses may be eligible for the foreign earned income exclusion. For more information on the exclusion, get Publication 54.

Residents of Guam, American Samoa, and the Northern Mariana Islands may be able to exclude income from these possessions. This possession exclusion does not apply to wages and salaries of military and civilian employees of the U.S. Government. If you need information on the possession exclusion, get Publication 570, Tax Guide for Individuals With Income From U.S. Possessions.

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