OK ... the income was already excluded on the W-2 box 1 so you are not being taxed on that income at all. Now they should not have withheld taxes on the non taxable income however if they did then they are included in the box 2 (fed) and box 17(state) withholdings ... so when you complete the return the excess withholding is refunded naturally.
Thanks for your response, makes sense I'm just asking because my refund seems normal or even lower than average and does not seem to be accounting for 3 months' worth of non-taxed combat zone pay. It seems like the overall refund should be significantly higher. It's not clear how the exclusion was accounted for, my tax return just shows my post-exclusion income and the exclusion amount.
When you say "refunded naturally", do you mean I'll get a separate direct deposit crediting that account back to me? Or something else?
Ok ... refunded naturally means if you had too much withheld overall then you get the excess back automatically on the return(there is no separate check) ... that is what an income tax refund is ... whatever excess was withheld above the taxes owed is refunded.
Look at the 2018 W-2 ... the box 1 amount is reduced by the box 12 code Q amount and also any TSP code D amounts ... these are not taxable. Box 5 has your total income earned for the entire year ... notice it is much more than box 1 (the amount being taxed on the return).
However I think you really need to look at the LES statements for the time you were deployed ... usually there is no fed or state withholdings for the periods where the income is non taxable. Review how much was withheld in 2017 vs the income and in 2018 vs the annual income on the W-2 forms ... do you see the difference? If you had less withheld then your refund would also be less naturally. Review the 2017 & 2018 returns side by side to see how this happens. Having a lower or same refund as last year is probably correct.