How do I file my tax return if my combat pay was included in box 1 wages and I am a civilian working contract?

Question

Was my W-2 incorrect? Or is there some other line i need to fill in on my tax return to reduce this income?

Answer 1

If you're a civilian working contract, you don't have "combat" pay.  All of your income is taxable.  

The combat pay exclusion applies to military personnel and certain Federal Civil Service employees, not the employees of contractors.  Contractor employees are exempted from host nation (Iraq or Afghanistan) taxes only (if that is addressed in the Status of Forces Agreement, aka "SOFA"), not US taxes.

Answer 2

No, your W-2 is correct.  Only active military below a certain rank qualify for the combat pay exclusion.  As a civilian employee, you aren't eligible.