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Under what circumstances should a military contractor stop withholding taxes? Let’s explore Form 673: not just the process for filling it, but also where to send it.
US military contractors and employees received some good news with the enactment of the Bipartisan Budget Act of 2018. For tax years leading up to December 31, 2017, electing the Foreign Earned Income Exclusion (FEIE) and foreign housing exclusion was not allowed for US taxpayers working in designated combat zones due to having an abode in the US.
As US taxpayers, worldwide income—including income earned while abroad—is liable for US income taxation. The FEIE and housing exclusions, however, allow US taxpayers to exclude their foreign earnings from US income tax (up to certain limits and adjusted each year). The difference is significant: a family of four and filing jointly with $150,000 of foreign earned income for 2017 can face approximately $4,750 in federal income tax if taking the FEIE. For comparison, the tax liability would be close to $21,750 without the exclusion.
The Bipartisan Budget Act of 2018 allows an exception, however, for those that are:
With this new regulation in place for tax years 2018 onwards, qualifying taxpayers, even those with a US abode, are eligible to exclude their foreign earnings (up to $105,900 in 2019), in addition to claiming the housing exclusion.
A US employer is still required to withhold income taxes on the earnings. Filing Form 673 (also known as the Statement for Claiming Exemption From Withholding on Foreign Earned Income Eligible for the Exclusion(s) Provided by Section 911) with your employer is recommended in these cases. Overseas employees can request to have their US employers not withhold taxes on these excluded wages. By filing Form 673, income tax withholding will be exempt up to the maximum amount of excludable income through the FEIE and foreign housing exclusion for the applicable tax year.
The result is an increase in cash flow to employees and access to additional funds throughout the year.
Note that Form 673 is only applicable to US citizens. Non-US citizens can prepare their own statement as an acceptable substitute for Form 673. Employers will keep this information on file and apply the withholding taxes accordingly. However, they must continue to withhold taxes if they have reason to believe the foreign earned income and housing exclusions will not apply.
Form 673 does not apply to US taxpayers who are consultants, contractors, or other non-employees; withholding taxes is not applicable for these taxpayers.
Form 673 is essential in order to claim your exemption from income tax withholding. Greenback can help in ensuring this is accurately filed, so get started with us today!