Afghanistan Taxes: Are Expats Working There 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 for Afghanistan taxes. 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).
Working in Afghanistan: 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 2020, 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.
Afghanistan Contractors: 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 2020, the maximum FEIE amount was $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, even as Afganistan contractors.
For other tax-paying purposes, there is also additional information that could prove to be helpful.
Afghanistan Income Tax Rates
The income rates in Afghanistan are progressive and capped at 20%.
|Taxable Income in Afghanistan (AFN)||Rate Applicable to Income Level (%)|
|Up to 12,500/month||exempt|
|100,001 and above/month||AFN 8,750 + 20%|
Unlike many other countries that determine residency based on the number of days you’ve been in the country, Afghanistan has a more formal process that requires individuals to file for residency. Those who are not residents will only be taxed on any income that comes directly from an Afghanistan source.
Tax Deadlines in Afghanistan
The tax year in Afghanistan runs from March 21 – the first day of Haman – to March 20th, which is the last day of Hoot. If your only source of income is from an Afghani employer, you will not need to file taxes with the Ministry of Finance since employers are required to withhold taxes.
Social Security Taxes
Individuals are required to pay 3% of all earnings into Afghanistan’s social security system. This money goes toward healthcare, unemployment insurance and disability insurance for Afghani nationals.
In addition, US expats may also need to pay into US Social Security, depending on their residency status.
Other Taxes in Afghanistan
In addition to salary, nearly all other forms of income from Afghanistan are taxed. This includes dividends, capital gains, royalties and fees. While there is no tax treaty between the US and Afghanistan, both countries have tools in place to reduce dual taxation in the event that taxes are paid to both governments.
Foreign Bank Account Reporting
If you are a US citizen or resident, you will still be required to file US taxes each year. If you have assets in foreign bank accounts, you may be required to report those as well. Specifically, anyone with 10,000 dollars or more in a foreign bank or financial institution during a calendar year will be required to file the FBAR.
Greenback Can Help Expats Working in Afghanistan
We specialize in expat taxes. Let us show you how easy filing US expat and Afghanistan taxes can be. Get started now.
Use our simple excel calculator to get an estimate of how the foreign earned income exclusion will save you money. It will make your day!