If an individual dies while operating in a combat zone, or during a military or terrorist action, is his income taxable?
Pub. 3, Armed Forces' Tax Guide explains:
"Forgiveness of Decedent’s Tax Liability
Tax liability can be forgiven, or if already paid, refunded, if a member of the U.S. Armed Forces dies:
- While in active service in a combat zone,
- From wounds, disease, or other injury received in a combat zone, or
- From wounds or injury incurred in a terrorist or military action.
. . .
Combat Zone Related Forgiveness
Combat zone related forgiveness occurs when an individual meets both of the following criteria.
- Is a member of the U.S. Armed Forces at death.
- Dies while in active service in a combat zone, or at any place from wounds, disease, or injury incurred while in active service in a combat zone.
Except as limited in Deadline for Filing a Claim for Tax Forgiveness, later (in Pub. 3), forgiveness applies to:
- The tax year death occurred, and
- Any earlier tax year ending on or after the first day the member served in a combat zone in active service.
In addition, any unpaid taxes for years ending before the member began service in a combat zone will be forgiven and any of those taxes that are paid after the date of death will be refunded."
For further details, see Pub. 3.