Good tax news is hard to find, but recently, the Bipartisan Budget Act changed the tax home stipulation for contractors as well as employees of contractors, so long as they worked in the US armed forces. To be eligible, they also must work in IRS-determined combat zones. Now, military contractors can claim the Foreign Earned Income Exclusion in Afghanistan—even if their abode remains in the US.
Combat Zones: Where Are They?
Today, the Afghanistan area, the Kosovo area, and the Arabian Peninsula have been designated as combat zones. Combat zone tax benefits have been identified by Congress for the Sinai Peninsula of Egypt under certain circumstances. Though the former Yugoslavia is no longer treated as a combat zone, certain benefits may still be available to those who served in that area at that time. Each of the combat zones, the Sinai Peninsula, and the former Yugoslavia area are discussed in more detail in IRS Publication 3.
Military Contractors Can Claim the FEIE in Afghanistan
In the 2018 income tax year, a permanent change in the law extended the Foreign Earned Income Exception to military contractors and their employees. Military contractors and their employees are still required to satisfy the physical presence test, which states that the taxpayer must be physically present in the foreign country for more than 330 days in a consecutive 12 month period.
Notably, this exception does not apply to individuals serving in the US Armed Forces. Individuals serving in the US Armed Services do not qualify for the foreign earned income exclusion. Those working in the US armed forces may be eligible for combat pay exclusion when deployed to designated combat zones. The combat pay exclusion is discussed in detail in IRS Publication 3.
How to Use the Foreign Earned Income Exclusion in Afghanistan
In 2019, the maximum foreign earned income exclusion for a qualifying person with qualifying income was $105,900. In 2020, the FEIE increases to $107,600.
To be eligible for the Foreign Earned Income Exclusion in Afghanistan, a qualified taxpayer (US citizen or Green Card holder) must meet the requirements of either the bona fide residence test or the physical presence test. The taxpayer must also have established a tax home in a foreign country and have no abode in the United States.
A “tax home” is essentially defined as the in the area of the taxpayer’s regular or primary (if the taxpayer is a digital nomad and travels frequently) place of business or employment. So, you can think of your tax home as wherever you consider your long-term job to be, whether you’re an employee or self-employed. If your place of business shifts often, your tax home might be your regular home. As you’ve probably guessed, if you live and work primarily in Afghanistan, that country will be your tax home.
However, if you travel frequently, determining your tax home an qualifying for the FEIE in Afghanistan can be more complicated. Your tax home is the place where you are permanently or indefinitely engaged in working as an employee or if you are self-employed. If you do not have a regular or principal place of business in Afghanistan, your tax home is likely going to be considered the place where you consistently reside—which may or may not be in that country.
If you have no regular place of home or business in any country, then you are considered an itinerant, and your tax home is wherever you work. This is not always the best situation for expats, because it means you cannot write off any travel deductions.