Expats Working in Afghanistan: Are They Tax Exempt?
While working in Afghanistan, some of your income may be tax exempt thanks to exclusions that lower your US tax bill. The IRS-defined differences between a military contractor and a government worker determine what exemptions the two categories of workers can get. So, let’s talk about the expats working in Afghanistan, and what type of work they need to be doing to claim the Foreign Earned Income Exclusion.
Some members of the armed services, US military contractors and their employees, US government employees (non-military), and US civilians (otherwise employed) are stationed or reside in dangerous areas that are designated as combat zones by the IRS. In every country, US citizens are required to file annual tax returns based upon their worldwide income. However, each of the above employee classifications are all treated differently, and the difference determines whether the employee can claim the Foreign Earned Income Exclusion (FEIE).
Members of the US Armed Services
Unfortunately, members of the US armed services are not eligible for the FEIE. However, armed service members working in Afghanistan may be able to exclude their income under the combat pay tax exemption. According to IRS Publication 3, anyone who is an enlisted member or warrant officer (commissioned or not) do not need to report their combat pay for tax purposes. There is a limited amount of combat pay that can be excluded, which applies specifically to commissioned officers. Essentially, the amount of the exclusion caps at the top rate of enlisted pay for every month you served in a combat zone or were hospitalized due to your service. The amount includes imminent danger and hostile fire pay you received. For 2018, the amount is $8,586 per month, calculated by adding $8,361 for the highest pay, plus $225 for imminent danger.
Tax Exemptions for Military Contractors in Afghanistan
Military Contractors and their employees may now claim the FEIE as long as they are physically present for more than 330 days in a foreign country in a consecutive 12-month period or become a bona fide resident of Afghanistan.
The Bipartisan Budget Act of 2018 changed the tax home requirement for contractors or employees of contractors supporting the armed forces in combat zones, enabling these individuals to claim the FEIE even if their abode is still in the US—which was not the case before. The 2018 tax act provided an exception to the general condition that a US taxpayer must show that their abode and tax home are established overseas. The change was effective for the 2018 income tax year and moving forward.
US Government Employees and the FEIE
US government employees are not eligible for the FEIE, the foreign housing exclusion, or the foreign housing deduction.
Tax Exemptions for Civilian Employees Working in Afghanistan
US citizens working in Afghanistan are eligible to claim the FEIE so long as they establish a tax home and an abode in Afghanistan. US citizens must also be physically present for more 330 days in a foreign country in a consecutive 12 month period or become a bona fide resident of Afghanistan.
In 2019, the maximum FEIE amount was $105,900. In 2020, the exclusion increases to $107,600. Keep in mind that foreign earned income doesn’t include passive income like dividends, royalties, rent, pensions, and capital gains.
If all of these conditions are satisfied, civilian taxpayers living and working in Afghanistan can exclude from their taxable income a portion of their foreign earned income.
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