If you or your spouse got nontaxable pay as a member of the Armed Forces, you don’t have to include it as earned income on your federal taxes. According to the IRS, If you and your spouse do choose to include your nontaxable pay as earned income for the EITC, you may owe less tax and get a larger refund. The person who includes your nontaxable pay as earned income must include all of it.
The message you saw is TurboTax trying to help you get the best tax advantage. Here's what to do:
- Type in the term earned income credit in the Search tool.
- Click on the Jump to link in the list.
- Revisit the Earned Income Credit questions. Change your answer to No for "Do you want to include nontaxable combat pay?"
More information about Excludable Income
You can exclude the following income related to military compensation:
- Basic Pay – All for every month you are present in a combat zone.
- Reenlistment or Continuation Bonuses – You can exclude this income if the reenlistment or the execution of the contractual agreement for continued service occurred while present in a combat zone.
- School Loan Repayments – You can exclude part of the repayment associated with the months you were present in a combat zone. For example, if a year is required to earn the repayment and you serve six of those months in a combat zone, you can exclude half of the repayment income.
- Imminent Danger/Hostile Fire Pay – You can exclude all of this income.
- Leave Benefits – You can exclude income from selling accrued leave earned while in a combat zone.
- Awards and other Financial Incentives – You can exclude associated income for submissions made while in a combat zone.
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