Combat pay is never taxable to most Armed Forces members. For the purposes of the EIC only, members of the U.S. Armed Forces who served in a combat zone may elect to include their nontaxable combat pay in their earned income. Doing this may increase or decrease the taxpayer's EIC.
Figure the EIC amount with and without combat pay before making the election. If the election is made, all of the nontaxable combat pay must be included. If both spouses filing a joint return have combat pay, they can individually choose to make the election on the tax return.
Nontaxable combat pay is shown in box 12 of Form W-2, designated with code Q.
If you correctly enter all fields of Form W-2 into the tax software, it will automatically compute the EIC with and without nontaxable combat pay, and will choose the method that results in the highest EIC for the taxpayer.