Military Personnel: Active Duty Compensation and Its Tax	 
Treatment (07-MAY-04, GAO-04-721R).				 
                                                                 
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.	 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-04-721R					        
    ACCNO:   A09965						        
  TITLE:     Military Personnel: Active Duty Compensation and Its Tax 
Treatment							 
     DATE:   05/07/2004 
  SUBJECT:   Income taxes					 
	     Military compensation				 
	     Tax credit 					 
	     Active duty expense allowances			 
	     Military personnel 				 
	     Fringe benefits					 
	     Tax administration 				 
	     Earned Income Tax Credit				 
	     Additional Child Tax Credit			 

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GAO-04-721R

United States General Accounting Office Washington, DC 20548

May 7, 2004

The Honorable Charles E. Grassley
Chairman
The Honorable Max S. Baucus
Ranking Minority Member
Committee on Finance
United States Senate

The Honorable Mark Pryor
United States Senate

Subject: Military Personnel: Active Duty Compensation and Its Tax
Treatment

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.1 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, you asked us to
provide you information on active duty military compensation and its tax
treatment. At the outset of this engagement, we agreed to keep you
periodically informed of the status of our work. In January 2004, we
briefed your staff on our preliminary observations. Because our work
identified that the combat zone tax exclusion2 could impact some service
members, you 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 your staff
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

1 U.S. General Accounting Office, Military Personnel: Active Duty Benefits
Reflect Changing Demographics, but Opportunities Exist to Improve,
GAO-02-935 (Washington, D.C.: Sept. 18, 2002). 2 The combat zone exclusion
allows service members to exclude income earned for each month served in
one of the 15 designated combat zones. Members who serve a minimum of 1
day in a combat zone are eligible to receive the combat zone exclusion for
the respective month. For officers, the combat zone exclusion was limited
to $5,958 per month in 2003. Enlisted members' exclusion is not limited.

Page 1 GAO-04-721R Military Compensation

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 (see enclosure I). To
provide a rough estimate of the number of service members in 2003 who
suffered a net tax loss because of the interactions between serving in a
combat zone and certain tax credits, we used aggregate data compiled by
the Defense Manpower Data Center on the number of members who served in a
combat zone in 2003 and aggregate data on the percentage of spouses not in
the workforce from the 2002 Active Duty Survey. We believe that the data
is sufficiently reliable to estimate within a broad range the number of
people affected. We conducted our review from October 2003 through April
2004 in accordance with generally accepted government auditing standards.

Results in Brief

The foundation of military cash compensation is what the DOD calls regular
military compensation-the sum of basic pay, nontaxable allowances for
housing and subsistence, and the associated federal tax savings. Some
members also receive additional cash compensation in the form of special
pays, incentives, and other allowances. In total, there are over 50 of
these pays, incentives, and allowances, ranging from reenlistment bonuses
to clothing allowances and family separation allowances. The annual
amounts of these pays, incentives, and allowances range from a few hundred
dollars to thousands of dollars, and some of these are also nontaxable. In
general, regular military compensation progresses steadily with pay grade
and years of service. For example, a junior enlisted member with 3 years
of service might earn around $40,000 in cash compensation, while a senior
officer with 22 years of service could earn cash compensation of about
$130,000.

Military service brings with it significant tax advantages. Basic pay and
most other pays are generally subject to federal income tax; however,
certain allowances are not

3

taxed, such as the basic allowances for housing and subsistence. DOD
considers the federal tax advantage as the additional income military
members would have to earn in order to receive their current take-home pay
if their allowances for housing and subsistence were taxable. In fact, DOD
views the federal tax advantage as part of service members' cash
compensation when it compares military pay with civilian pay. In addition,
pay earned-including basic pay, bonuses, special pays, and
allowances-while members are serving in one of the 15 designated combat
zones is excluded from taxes.

The complex interactions between the combat zone exclusion and certain tax
credits (principally the Earned Income Tax Credit and the Additional Child
Tax Credit) appear to be creating unintended consequences. Specifically,
some low-income

3 Although the allowances for housing and subsistence are the primary
nontaxable allowances and account for most of service members' tax
benefit, some members may receive other nontaxable allowances, such as the
family separation allowance-that is, additional money provided to service
members as compensation for being away from their spouses and/or children.

earning service members who serve in a combat zone are worse off for tax
purposes, while some higher-income-earning members are better off because
they become eligible for a tax credit that is normally targeted to
low-income workers. Low-income members with children qualify for
refundable tax credits that can not only offset all of their tax liability
but can also leave them with payments from the government. The combat zone
exclusion can actually cause a reduction or elimination of these payments
to some service members. For example, over certain income ranges the
amount of Earned Income Tax Credit that a taxpayer earns increases as his
or her income increases. Service in a combat zone reduces the amount of
earned income that a member reports for tax purposes and, thus, can reduce
or eliminate the refunded portion of the member's credit. These members
actually suffer a net loss in tax benefits because they receive no
offsetting advantage from the exclusion. Our analysis suggests that some
of the roughly 430,000 members serving in a combat zone in 2003-between
5,000 and 10,000 members in one-earner households-suffered a

4

net loss of tax benefits. Data limitations make it difficult to produce a
comprehensive estimate of the number of members who suffered a net loss of
tax benefits. In particular, it is more difficult to make a reliable
estimate of the number of members with working spouses who had net losses
of tax benefits. However, we believe that number is not likely to be much
higher than several thousand and could be less than that. Additionally,
the number of members losing tax benefits could be larger in 2004
depending on the how many service members are in a combat zone and how
long they are there. The amount of the tax benefit loss varies
considerably, with a maximum of about $4,500 or $3,200, for enlisted and
officer members, respectively. In general, the members losing tax benefits
tend to be those who are serving in a combat zone longer than 6 months;
who are in the lower pay grades; who are married with children; and who
have little to no investment or spousal income. On the other hand, some
other low-income members earned larger earned income tax credits by
serving in a combat zone than they otherwise would have. Moreover, it
appears that a large number of service members who had incomes exceeding
the normal upper limit for Earned Income Tax Credit eligibility and who
served in a combat zone for at least 6 months could become eligible to
receive that credit as a result of this income exclusion. DOD is aware of
service members who are disadvantaged and advantaged by these tax
provisions, and it is seeking remedies that would require changing the
rules of the tax credits so that income earned in a combat zone would not
be excluded when calculating eligibility for the tax credits.

Benefits are a substantial portion of noncash military compensation. DOD
offers a wide range of benefits to active duty members, including health
care, retirement, education assistance, and installation-based
benefits-that is, services found on military installations, such as
commissaries and child care. While the value of benefits to members varies
depending on the members' needs, the cost to provide such benefits is
substantial. 5 Some of the benefits DOD provides encourage wealth

4 Our estimates are based on information provided by DOD on the number of
households with a spouse
not in the labor force, the amount of military members' pay, and the 2003
deployment rates. They are
also based on the assumption that deployed personnel in each pay grade
have the same household
characteristics as the total population of service members in each grade.
These estimates are
imprecise because we did not have information such as total family income,
deductions, and other tax
credits. See enclosure II for further details on our methodology.
5 According to a recent Congressional Budget Office report, noncash
benefits in 2002 cost an average
of $56,000 per active duty service member. However, this cost includes
noncash compensation that

building over a service member's career. Military retirement-a lifetime
annuity generally provided to members who serve 20 years or more-is one of
the primary wealth-building programs available to military members.
However, DOD estimates that less than half of officers and only about 15
percent of enlisted members will become eligible for retirement. In
addition, other savings programs are offered, such as the Thrift Savings
Plan and the Savings Deposit Program. Since 2001, service members can
contribute a percentage of their basic pay, before taxes, to be invested
in one or more of the specific funds offered through the Thrift Savings
Plan; about 21 percent of the active duty military participate. Service
members deployed to a combat zone or other qualified areas can contribute
to the Savings Deposit Program,

6

earning a guaranteed 10 percent interest on their investment. However,
less than 1 percent of the active duty force participates. Service members
may also be eligible to participate in the Department of Veterans Affairs
no-money down, mortgage-backed loan program. Moreover, military members
can take advantage of a number of wealth-building tax provisions available
to citizens, such as deductions for mortgage interest and tax credits for
elective retirement accounts contributions.

Matter for Congressional Consideration

If the Congress wishes to remedy the unintended tax consequences
associated with the combat zone exclusion, it should 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.

Scope and Methodology

Our audit work focused on military cash compensation and its tax treatment
for active duty service members. To summarize the components of active
duty military members' compensation, we reviewed policies, publications,
and regulations governing military compensation. We interviewed officials
from the Office of the Secretary of Defense and the Defense Manpower Data
Center. We compiled 2003 data for basic pay tables, basic allowances for
housing and subsistence rates, special pay amounts, incentive pay amounts,
and allowance pay amounts. To describe how military compensation varies at
different career points for officers and enlisted members, we created
notional junior and senior enlisted service members and officers. We
assigned these hypothetical service members typical years of service for
their pay grades, locations across the United States, numbers of
dependents, and special pays typical of their pay grades and locations. We
discussed our examples with officials from the Office of the Under
Secretary of Defense for Personnel and Readiness to ensure that our
profiles were reasonable. We identified benefits offered to active duty
military members and some associated values by reviewing past GAO reports,
DOD documents, and the fiscal year 2002 DOD Actuarial Valuation Report.

service members receive while on active duty and estimated accrued cost of
deferred compensation
for the following noncash benefits: health care for service members, their
dependents, and retirees;
veterans' services; and other benefits, such as the Social Security
Old-Age and Survivors Insurance and
Disability Insurance programs. Also, this cost includes installation-based
services for active duty
members. Congressional Budget Office, Military Compensation: Balancing
Cash and Noncash
Benefits (Washington, D.C.: Jan. 16, 2004).
6 Members deployed to combat zones, qualified hazardous duty areas, or
certain contingency
operations are eligible to participate in the Savings Deposit Program.

To explain how military pay is taxed and any special tax treatment of
military compensation, we reviewed DOD policies and regulations and the
Internal Revenue Services' 2003 Armed Forces Tax Guide publication. To
estimate the federal tax advantage of the exclusion of the housing and
subsistence allowances from taxation, we estimated the tax liability for
hypothetical members according to current tax rules as if the members'
housing and subsistence allowances were taxable. We present the pre-tax
value of this tax advantage-that is, the additional income the members
would have to earn in order to receive their current take home pay if
their allowances were taxable.

To estimate certain effects of the combat zone exclusion on military
members' taxes, we estimated the number of members negatively affected and
the number who may become eligible for Earned Income Tax Credit by the
combat zone tax exclusion. For more detailed information on how we
estimated the combat zone effect, see enclosure II.

To describe programs available to members that encourage wealth building,
we reviewed documents and interviewed officials from the Office of the
Secretary of Defense and the Department of Veterans Affairs. In addition,
we also reviewed other documents to identify tax provisions that encourage
wealth building for citizens.

Agency Comments

In providing oral comments on a draft of this report, DOD representatives
from the Office of the Under Secretary of Defense for Personnel and
Readiness stated that they generally concurred with the content of the
report. Technical comments were incorporated as appropriate. DOD officials
told us that they have been seeking to remedy the unintended tax
consequence related to the combat zone tax exclusion. We also received
comments on the tax-related sections of our draft from Internal Revenue
Service (IRS). In providing oral comments, IRS representatives from the
Office of the Commissioner, Wage and Investment Division and the Office of
Legislative Affairs said that the IRS could administer a change in law
that would include combat pay in earned income for purposes of computing
eligibility for the Earned Income Tax Credit. Since earned income used for
computing Earned Income Tax Credit is not reported anywhere on the IRS
form 1040 or Schedule EIC, IRS would modify the Earned Income Tax Credit
worksheets and related instructions to account for the combat zone pay. In
addition, they would work with DOD to develop a process for identifying
and processing returns from taxpayers who would be affected by this
provision. The representatives noted that, although at the outset the
process would likely be primarily manual, IRS would explore options for
automation. The IRS officials also provided technical comments relating to
the child tax credit, which we incorporated as appropriate, and made the
point that changes to the treatment of income earned in a combat zone for
the purposes of the two credits could affect other tax benefits, such as
the dependent care credit and the exclusion for employer-provided benefits
under a dependent care assistance program, depending on the specific
wording of the changes. We also spoke to the Department of Treasury staff
about the tax-related sections of our briefing documents and incorporated
their technical comments as appropriate.

                                     ------

As arranged with your office, unless you publicly announce its contents
earlier, we
plan no further distribution of this report until 30 days from its issue
date. At that
time, we will send copies of this report to the Secretary of Defense and
the
Commissioner of the Internal Revenue Service. We will also make copies
available to
appropriate congressional committees and to other interested parties on
request. In
addition, the report will be available at no charge on our Web site at
http://www.gao.gov.

If you or your staff have any questions about this report, please contact
Derek
Stewart, (202) 512-5559, or James White, (202) 512-5594, or e-mail them at
[email protected] or [email protected], respectively. Key contributors to this
report
were Lori Atkinson, Jennifer Gravelle, John Pendleton, Sonja Ware, and
James
Wozny.

Derek B. Stewart
Director, Defense Capabilities and Management

James R. White,
Director, Strategic Issues

                                                   Years of service
Pay grade    <2       2       3       4       6       8      10      12      14      16      18       20    
Officer-9     -       -       -       -       -       -       -       -       -       -       -    $126,763 
Officer-6  $55,238 $60,685 $64,667 $64,667 $64,915 $67,694 $68,065 $68,065 $71,935 $78,772 $82,786   86,800 
Officer-3   34,934  39,604  42,746  46,602  48,834  51,282  52,870  55,480  56,833  56,833  56,833   56,833 
Enlisted-9    -       -       -       -       -       -     42,772  43,740  44,964  46,404  47,848   50,170 
Enlisted-7  24,822  27,094  28,127  29,138  30,197  32,015  33,041  34,060  35,885  36,796  37,663   38,192 
Enlisted-3  16,283  17,305  18,346  18,346  18,346  18,346  18,346  18,346  18,346  18,346  18,346   18,346 

                             Range of annual allowance in dollars
           Pay grade         Without dependents           With dependents     
         Officer 1-10             $5,532 - 35,064         $6,336 - 41,292     
      Warrant officer 1-5         5,940 - 33,000           7,188 - 37,284     
         Enlisted 1-9             4,512 - 29,952           6,012 - 35,352     

                     Pay grade                 Annual allowance in dollars 
      Enlisted 1-9 Warrant officer 1-5 Officer          2,914 2,006 $2,006 
                        1-10                   

                  Enlisted-3 -3   Enlisted-7 -14                              
                  years of       years of service  Officer-3 -6               
                  service -Camp    -Keesler Air      years of                 
                  Pendleton,        Force Base,    service -Ft. Officer-6 -22 
                  California        Mississippi      Stewart,     years of    
Compensation   -Spouse and 1    -Spouse and 2     Georgia       service    
(Annual Amount child -Special children -Special -Spouse and  -Washington,
in Dollars)    pays: Imminent   pays: Foreign    3 children  D.C. -Spouse
                  Danger and         Language        -Special    and 1 child
                  Family            Proficiency       pays:     
                  Separation         Selective      Parachute   
                  Allowance        Reenlistment      Jumping    
                                       Bonus                    
      Regular                                                                 
      Military                                                  
    Compensation                                                
     Basic pay           $18,346           $35,885      $48,834       $89,082
    Basic housing         12,660             9,900       11,064        28,140 
       allowance1                                               
       Basic                                                                  
    subsistence            2,914             2,914        2,006         2,006
     allowance                                                  
    Tax advantage                                                             
     from the two          4,544             2,261        2,306        10,958
      allowances2                                               
    Special pays                                                              
      Regular       3,000 38,464      9,632 50,960 1,800 64,210     0 130,186
      military                                                  
    compensation                                                
     Total cash                                                               
    compensation         $41,464           $60,592      $66,010      $130,186

to the Military Program                    Description                     
                           o Members who remain on active duty for 20 or more 
                           years are eligible  o Members make no contribution 
     Military Retirement     to this.  o No vesting is offered prior to 20    
                            years of service-currently DOD estimates that 47  
                              percent of officers and about 15 percent of     
                                enlisted members will reach retirement.       
                           o Since 2001, members can contribute a percentage  
                            of their basic pay to be invested in one or more  
     Thrift Savings Plan   of the funds offered by the Plan, before taxes.  o 
                              Participation rates for active duty military    
                                        personnel is 21 percent.              
                             o Members deployed to a combat zone, qualified   
                              hazardous duty areas, or certain contingency    
     The Savings Deposit   operations can contribute up to $10,000 and earn a 
           Program            guaranteed 10 percent interest rate.  o The     
                               interest earned is taxable.  o Across the      
                                services, less than 1 percent of members      
                                              participate.                    
                            o No money down, mortgage-backed loan program is  
      Veterans Affairs      available to service members who have served 181  
    Guaranteed Home Loan     days on regular active duty and have not been    
                            discharged from a previous qualifying period of   
                                              active duty.                    

      Methodology for Estimating Tax Effects of the Combat Zone Exclusion

This enclosure describes the data and methodology we used to estimate (1)
the extent of net loss of tax benefits from the combat zone exclusion and
(2) the number of higher-income members who become eligible to earn the
earned income tax credit as a result of service in a combat zone.

Estimating the Extent of Net Loss of Tax Benefits

The tax effect of the combat exclusion is the difference between what a
member's tax liability would have been with no time spent in a combat zone
and his or her actual tax liability after having spent one or more months
in a combat zone. The only conditions under which this tax effect can be
negative is if (1) the service member's tax liability would have been
negative if he or she spent no time in a combat zone and (2) the member's
actual liability was a smaller negative value, zero, or positive after
service in a combat zone. The first of these conditions is met if the
member would have been able to earn refundable tax credits that more than
offset his or her precredit tax liability. The second condition is met if
the combat zone exclusion reduces the member's earned income to such an
extent that the refunded portion of the member's tax credit is reduced or
eliminated.7

Due to significant data limitations, we were not able to make a precise
estimate of the number of service members negatively affected by the
combat zone exclusion in 2003. Nevertheless, the limited data available
from DOD permitted us to estimate the rough order of magnitude of this
number. The only way to make precise estimates of the two different tax
liabilities (both in and out of the combat zone) for each member that
served in a combat zone in 2003 would be to match personnel data from DOD
with tax records from IRS for each of those members. We could not follow
this approach because IRS records for 2003 would not be available to us
for months. Given the time frames of this report, the only data we were
able to use were Defense Manpower Data Center's aggregate numbers of
service members in each enlisted and officer grade that were deployed in
combat zones during 2003 and the limited data that DOD could provide us on
relevant characteristics of service members, aggregated at the grade
level. After discussing the reliability of the combat zone data with
agency officials, we determined the data to be sufficiently reliable for
our purposes.

Our overall estimation approach involved two steps. The first step was to
compute the two tax liabilities for an extensive set of hypothetical
service members. These hypothetical computations identified every
combination of pay level, family size, and length of service in a combat
zone during 2003 that could have resulted in a negative tax effect. The
second step in our methodology was to use data on the characteristics of
all active military personnel, by pay grade, as well as data on the number
of service members from each pay grade that were deployed in a combat zone
during 2003 to estimate the number deployed members who had

7 The only refundable tax credits that are likely to be widely used by
members of the military are the earned income tax credit and the
additional child tax credit. Over certain income ranges, the amount of
credit that a taxpayer earns increases with earned income. Income earned
in a combat zone is not included as earned income for the purpose of
computing these credits. Consequently, there are cases where the combat
zone exclusion reduces the refunded portion of the credits that members
would otherwise have earned.

income and family characteristics consistent with the hypothetical cases
that showed negative effects.

Data from the DOD's Selected Military Compensation Tables (current as of
October 2003) allowed us to make reliable estimates of the percent of
married service members within each pay grade with one, two, three, and
four or more children. The data indicated that the number of single
service members with children in each grade was negligible, and so we
excluded this subpopulation from our analysis. The same data source
enabled us to determine the basic pay of service members, by pay grade and
years of service. However, we did not have data on three other types of
taxable income that we needed for our estimates: special pays, investment

8

income, and spousal income. In the absence of the special pay and
investment income data we used ranges of assumptions for the amounts of
each of these types of income that each service member earned. These
ranges of assumptions are reflected in the range that we provide for our
end results. To deal with the lack of data on spousal income, we separated
the service member

9

population into two groups-those with spouses in the labor force and those
without. The lack of data on spousal income does not affect our estimates
for members without spouses in the labor force. Consequently, we could
more easily estimate, at least within a broad range, the number of members
in that group who were negatively affected by service in the combat zone.
In contrast, we did not feel that we could reliably specify a range for
the number of members with working spouses who were negatively affected;
however, as we explain below, we were able to assess a rough order of
magnitude for this group.

By combining the family and pay grade data listed above, we were able to
estimate the number of all service members within a particular pay grade
and with a specific number of years of

10

service who had nonworking spouses and various numbers of children. We
also had DOD data that allowed us to determine what percent of members in
each pay grade were deployed in a combat zone for one month, what percent
were deployed for two months, etc., for all possible lengths of stay in a
combat zone. By assuming that the distribution of family characteristics
across the deployed members within a particular pay grade and
years-of-service category was the same as the distribution across all
members (deployed or not) within that same grade and category, we were
able to estimate the number of members with nonworking spouses who had the
specific combinations of pay, family characteristics, and months of
service in a combat zone that would have resulted in a net loss of tax
benefits.

In the case of members with working spouses, we followed an approach
similar to that just described; however, due to the lack of data on
spousal income, there is greater uncertainty surrounding each member's
household income and, thus, greater uncertainty about whether the member
was negatively affected. Through our computations for hypothetical
taxpayers, we determined that only members in grades E-1 through E-6 with
working spouses were likely to

8 We did not need information on nontaxable allowances because they have
no effect on tax liabilities either in or
out of a combat zone and, therefore, had no effect on our estimates.
9 The July 2002 Status of Forces Survey of Active-Duty Members showed the
percent of members with spouses not
in the labor force. This survey percent is provided by broad pay grade
groups, rather than for each individual grade
(e.g., there was a single percent for all members in pay grades E1 to E3).
10 An important assumption that we made when combining these data is that
the work status of a member's spouse
was independent of the number of children that the member has. (The
available data showed the percent of
members by aggregated pay grade levels with a spouse not in the labor
force and, separately, showed the percents
of members in each grade with various numbers of children. The data did
not show the joint occurrence of a
nonworking spouse and a specific number of children.)

be negatively affected, and the large majority of those would be affected
only if their spouses earned less than $6,000 in 2003. We estimate that up
to about 25,000 members with working spouses were in a combat zone for
long enough periods in 2003 to have the potential to be negatively
affected if their spouses' incomes were sufficiently low. We do not have
actual data on the number of spouses with income low enough to have a
negative effect. However, we believe that likely only a small percentage
of them actually were negatively affected.

Estimating the Number of Higher-Income Members Who Become Eligible for the
Earned Income Tax Credit

To estimate the number of higher-income members who become eligible for
the Earned Income Tax Credit, we follow the same general approach
described above. However, instead of using tax rules and data on income,
family size, and lengths of stays in combat zones to identify those
members whose specific circumstances would result in a negative tax
effect, we used the same information to identify those members who would
not qualify for the Earned Income Tax Credit under normal circumstances,
but who do qualify when they are deployed for a sufficient length of time
in a combat zone.

As was the case with our estimates of the net loss of tax benefits, we
cannot make a reliable estimate for members with working spouses.
Although, we cannot make an estimate for the population of members without
children, those members can qualify for an Earned Income Tax Credit of up
to $400, but only if they are over 25 years old. We have no information on
the age of members deployed in 2003, so we cannot determine how many of
these members would qualify.

(350425)

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