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Tax Advice for Specific Needs
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.
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 at least 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 not available to citizens living stateside. This applies equally to military contractors. (More below.)
The Combat Zone Exclusion 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!
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.
To claim the FEIE, US persons must qualify under one of two tests: the physical presence test or the bona fide residence test.
In addition to these tests, most US persons must also establish a tax home outside of the US. However, since 2018, 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.)
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 in the same year as the Foreign Earned Income Exclusion. You must choose one or the other.
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.
The standard tax deadline for all US persons is April 15 (April 18 in 2022 and 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 will not be charged any penalties.)
The question of whether military contractors pay state taxes will hinge on what 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 do 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:
To learn the details in your case, consult a qualified expat tax professional.
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 we’d be happy to help you.
Whether you need tax advice to prepare for a move abroad, to buy property or even retire, Greenback can help. Consults upfront can help avoid costly mistakes and stress later.