When working overseas as a military contractor, you can expect the requirements for your expatriate taxes to be the same as civilian US citizens working abroad. You’ll need to report your worldwide income on your US Tax Return, but you may be able to save on your US expat taxes with certain credits, deductions and exclusions. Read on for five important things to know if you are or plan to work as a military contractor abroad.
1. Foreign Earned Income Exclusion
As a military contractor, qualifying for the Foreign Earned Income Exclusion (FEIE) can be tricky, and may only be applicable to you in certain scenarios. The FEIE allows US taxpayers to exclude up to $101,300 from 2016 expatriate taxes and $102,100 for 2017 taxes, but in order to qualify, you must have a ‘tax home’ in a foreign country and meet one of the two tests below:
- Physical Presence Test – Requires that you live abroad for at least 330 days in a 365-day period. You can learn more about the Physical Presence Test in this article.
- Bona Fide Residence Test – Requires that you establish a permanent residence in a foreign country and maintain it for at least a calendar year, and you must have an intention to live in the foreign country for an indefinite amount of time. Learn more about the Bona Fide Residence Test here.
It can get complicated depending on the length of your overseas assignment as well as Status of Forces Agreements (SOFA) between some host and foreign countries that provide military support stationed in the host country. Some SOFA agreements offer visiting US citizens exclusion from taxation in the host country, but would prevent you from having a tax home in a foreign country, thus you wouldn’t qualify for the FEIE.
2. Combat/War Zone Exclusion
There are certain IRS regulations in place, which allow enlisted military personnel to exclude income earned in a combat zone from US expatriate taxes. However, it’s important to note that military personnel differ from military contractors – and unfortunately, contractors are not eligible to exclude income earned in a combat zone like a personnel member could.
3. Self-Employed? Read This
Whether you’re an independent contractor or an employee of a civilian business working under contract with the military, you may still qualify for the FEIE. However, as an independent contractor, you’ll receive a Form 1099 at the end of the year and you are responsible for self-employment tax on the income reflected on this statement. Self-employment tax cannot be reduced by the FEIE, but you may be able to deduct business expenses from your 1099 income. You can learn more about saving money on expatriate taxes in our guide for overseas contractors.
4. Filing State Taxes
Depending on the state you lived in before working overseas, you may continue to have a state filing requirement even while you’re abroad. It ultimately hinges upon the individual state’s rules and whether you’ve retained ties to the state in the form of your home, family or driver’s license, etc. If you’ve left the US for an assignment longer than one year and didn’t have any source income in the state during the tax year, you may not need to file. It’s a good idea to consult with an expat tax professional to fully understand your requirements.
5. Tax Due Date
US citizens who are working overseas on Tax Day (which was April 18th this year) received an automatic two-month filing extension (making expatriate taxes due June 15th). It’s important to note that this is simply an extension of time to file, but any tax owed is always due by April 18th or interest begins accruing until paid.
New in 2017, the FBAR deadline has changed to follow the US tax deadlines. For Americans overseas, the deadline was technically June 15th; however, there is an automatic extension until the October 16th deadline to help US taxpayers become acclimated to this deadline change.
Haven’t Filed Your Expatriate Taxes Yet?
If you haven’t yet filed your 2016 expat taxes or FBAR, it’s not too late to file! The sooner you file, the more you can save – so get started with one of our expert accountants today and make this year’s taxes a thing of the past!