US Expat Taxes Explained: Do Military Contractors Pay Taxes?
- Do Military Contractors Have to Pay Taxes While Overseas?
- Can Military Contractors Claim the Combat Zone Exclusion?
- What Tax Deductions Can Military Contractors Claim?
- Due Date for Military Contractor Expat Tax Returns
- Do Overseas Contractors Pay State Taxes?
- Still Have Questions About Your Overseas Contractor Taxes? We Can Help!
Thousands of military contractors are stationed overseas, supporting US military personnel around the world. If you are a military contractor, you probably have questions about your US tax obligations. What tax deductions can you claim as a military contractor? Do you have to pay taxes at all?
Here are the answers you need.
- Military contractors are required to file taxes like any other US citizen—no matter where they live and work.
- Failing to file and pay taxes as required can result in severe penalties.
- Military contractors can claim certain expat tax benefits to reduce or erase their US tax bill.
Do Military Contractors Have to Pay Taxes While Overseas?
Yes. Generally speaking, military contractors working overseas are taxed by the same rules as all other US citizens living abroad. (Military contractors are considered to be civilians for tax purposes, not US military personnel.)
This means that military contractors must file a federal tax return every year reporting their worldwide income. Depending on their state residency status, they may also have to file a state tax return.
The good news is that even civilians living abroad can claim expat tax benefits unavailable to citizens living stateside. This applies equally to military contractors.
Can Military Contractors Claim the Combat Zone Exclusion?
The Combat Zone Exclusion only allows military personnel to exclude their income from taxation while serving in a designated combat zone.
So—can military contractors also claim the Combat Zone Exclusion? Unfortunately, no. The Combat Zone Exclusion is only available for military personnel.
However, as mentioned above, military contractors can claim certain tax benefits. What benefits do we mean? Let’s take a look at the most common ways to reduce your expat tax bill as a military contractor.
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!
What Tax Deductions Can Military Contractors Claim?
1. Foreign Earned Income Exclusion (FEIE)
The Foreign Earned Income Exclusion (FEIE) lets US persons living abroad exclude a certain amount of foreign-earned income from taxation. The FEIE exclusion amount is adjusted from year to year based on inflation.
- The maximum exclusion for the 2023 tax year is set at $120,000.
To claim the FEIE, US persons must qualify under one of two tests: the physical presence test or the bona fide residence test.
- To qualify under the physical presence test, you must be outside of the US for at least 330 days out of any 365-day period.
- To qualify under the bona fide residence test, you must live in a foreign country or countries for at least one calendar year and have no plans to move back to the US in the foreseeable future.
Prior to 2018, in addition to these tests, most US persons had to also establish a tax home outside of the US. However, since then, this requirement has been waived for military contractors supporting the US military in a designated combat zone. (Prior to this change in the law, most military contractors failed to qualify for the FEIE because their tax home was still located in the US.)
You can apply for the FEIE regardless of whether you are an employee of a private military company or self-employed as an independent contractor. (Though, as an independent contractor, you cannot use the FEIE to reduce the self-employment taxes you owe.)
2. Foreign Tax Credit
If you pay taxes to a foreign government, you may be able to claim a dollar-for-dollar credit to offset your US tax bill and remove the risk of double taxation. This is known as the Foreign Tax Credit.
You cannot claim the Foreign Tax Credit on any income excluded under the Foreign Earned Income Exclusion.
3. Foreign Housing Exclusion (or Deduction)
As a military contractor employed overseas, you can use the Foreign Housing Exclusion to exclude certain foreign housing-related expenses from your US tax bill. This applies regardless of whether you rent or own a home.
If you are self-employed, you will use the Foreign Housing Deduction rather than the Foreign Housing Exclusion.
Due Date for Military Contractor Expat Tax Returns
The standard tax deadline for all US persons is April 15 (April 18 in 2023). However, US persons who are living overseas on that date are granted an automatic two-month extension to June 15. If you need more time to file than this, you can request an additional extension to October or even December.
If you need additional time specifically to meet the standards of the physical presence test or bona fide residence test, you can file Form 2350 to request this. The IRS may or may not approve your request.
Note that in every case of an extension—including the automatic expat extension to June 15—it is an extension to file, not an extension to pay. You still must estimate and pay any taxes you owe by the original deadline to avoid incurring interest. (As long as you pay at least 90% of your tax liability by the original deadline, you likely will not be charged any penalties.)
Do Overseas Contractors Pay State Taxes?
The question of whether military contractors pay state taxes will depend on which state you lived in before moving overseas. The rules vary by state.
Generally, if you left the US for an assignment of longer than one year and did not have any source income to a US state during the tax year, you will not have to file state taxes. However, some states will continue to tax your income if any of the following are true:
- You own a home in that state
- Your immediate family lives there
- The state has granted you a driver’s license or ID card
- You’re registered to vote there
- Your vehicle is registered there
- You maintain a bank account there
- You maintain a mailing address there
To learn the details in your case, consult a qualified expat tax professional.
Still Have Questions About Your Overseas Contractor Taxes? We Can Help!
If you’re a US expat working overseas as an independent contractor, you should take the time to get familiar with your tax obligations. It will save you plenty of trouble later on, not to mention the money and headaches that come with owing back taxes. We’ve got you covered if you’d like further help with your expat taxes.
Contact us, and one of our customer champions will gladly help. If you need very specific advice on your specific tax situation, you can also click below to get a consultation with one of our expat tax experts.