If the income on line 1 of Form IT-40 includes active or reserve military pay received by you, you will be eligible to take a deduction (regardless of your age).

Also, if you are retired from the military or are the surviving spouse of a person who was in the military, and you included military retirement income, you may be able to take this deduction if:

1. you were at least 60 years of age by December 31, 2005;
2. you were receiving military retirement or survivors benefits in the tax year; and
3. the total benefits received as retirement income were reported on your federal return.

This deduction is equal to the actual amount of military income received (i.e. military pay, retirement pay, and/or survivors benefits) or $2,000, whichever is less. If both you and your spouse received military income, you may each claim the deduction for a maximum of $4,000.

Note: Military income earned while in a combat zone may be exempt (not taxed) on your federal income tax return. If that income is exempt on your federal income tax return, then it will also be exempt (not taxed) for Indiana income tax purposes. Since Indiana isn't taxing this income, your combat zone income is not eligible for a deduction.

Example: Jim was stationed in a combat zone from February 1, 2005, through the end of the year. His W-2 form shows regular wage income of $950 (earned during January), and $9,000 income earned while being stationed in a combat zone. Only $950 of his income is taxed on his federal return; likewise, Indiana will only tax $950. Since Indiana is taxing $950 of Jim's military income, he will be eligible to claim a $950 military deduction (the lesser of the income being taxed ($950) or $2,000).

Important: If you are claiming this deduction you must enter your military W-2 forms, retirement pay statement and/or survivors benefit statement to the tax return.

Note: If you received both military pay and retirement pay or survivors benefits during the tax year, the total deduction cannot be greater than $2,000 per qualifying person. For example, if you earned $3,000 in military pay the first half of the year and $1,500 in retirement pay the second half of the year, you can deduct only $2,000 of your income.

For more information about this deduction, contact the Department to get Income Tax Information Bulletin's #6 and #27.

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