U.S. Income Tax Return Preparation and Advice for American Citizen (Expatriates) Working as Military Contractors
At Taxes for Expats we have been preparing U.S. tax returns for American Citizens working as military contractors for over 15 years. Our clients hail from all parts of the world - Afghanistan and Iraq, Kyrgyzstan and Japan, Pakistan and Haiti.
As a U.S. Citizen or green card holder you are legally required to file a U.S. tax return each year regardless of where the income was earned. The expatriate Foreign Earned Income Exclusion can only be claimed if you file your tax return on a timely basis. It is not automatic if you fail to file and can even be lost.
As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end. (You cannot file using the calendar year as is standard in France for U.S. tax purposes). You must, however, pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.
Work with a recognized expert who is intimately familiar with your field of work to help you prepare your tax return.
Below we include information on the Tax Issues relevant for Civilian Contractors working in Defense.
This section is fairly large as we cover a lot of pertinent topics. If you want to ask us a question - go right ahead and Contact Us, we’ll do our best to answer you right away.
Are you eligible for free tax preparation as a civilian contractor?
Unfortunately not. Only active-duty service members and their family members, retirees and their family members, DoD civilian employees and their family members, Reserve Component service members on active duty pursuant to orders for more than 29 days, surviving family members of active-duty, Reserve Component and retired service members who would be eligible for legal assistance if the service member or retiree were alive.
Civilian Contractors, without any other status mentioned under ‘Eligible Clients,’ are not authorized for free tax preparation pursuant to Army Regulation 27-3, paragraph 2-5. Under this regulation tax preparation is included under other correspondence or documents which Civilian Contractors are not allowed.
Are you eligible for Combat Zone Tax Exclusion?
The short answer is No. This privilege is reserved for enlisted and commissioned members of the US Armed Forces only (but then again - you know probably already know the pay difference between DoD and the private sector).
There is no IRS rule, waiver or special dispensation that will allow this. The only exclusion available to Expats working in combat zones and qualified hazardous duty areas is the foreign earned income exclusion. The only way you as an expat can qualify for the exclusion when working in a abroad is by utilizing the Physical Presence Test or Bona Fide Residence Test.
When is your tax return due? Do you have special fling deadlines because you were working in a war zone? Am you also exempt from interest or penalties while there?
You need to use the normal expat tax filing deadlines while working in a war zone. See our Due Date and Extension page for further information on those dates.
You work in a war zone. Do you automatically qualify for the foreign earned income exclusion?
No. You need to have been in the country and expected to qualify for the exclusions before the area was declared a war zone in order to qualify for a residency waiver due to adverse conditions in the foreign country. See Rev. Proc. 2006-28 for how this waiver applies. While this Revenue Procedure concerns individuals leaving Haiti in 2005, prior rulings are consistent with the findings in this Procedure.
You should also note that this waiver only applies to individuals who expected to qualify as a resident of the foreign country (bona fide residence test, or BFR). In most of the cases we see, the individual could not have expected to qualify for the exclusions under BFR even after arrival. See further discussion on this page relating to claiming the exclusions in a war zone.
Can you claim the foreign earned income exclusions even though you are exempt from host country taxation under a status of forces agreement (SOFA)?
Maybe but you most likely need to use the physical presence test to claim the foreign earned income exclusions. Status of Forces Agreements (SOFA) and similar agreements, such as multi-lateral defense agreements, provide special tax exemptions - usually from host country taxation for visiting US persons.
Is the bona fide residence test available even though you are exempt from host country taxes under a special agreement, such as a SOFA?
It is quite difficult to claim the bona fide resident test while covered under a SOFA or similar agreement. After losing court cases on this matter, the IRS issued Rev. Rul. 72-497 stating that a claim of BFR was possible. The standards of qualifying under BFR appears to be higher in such a situation. For example, you should expect to have your family with you at the host location and not residing in the states. For the IRS' prior interpretations, see Rev. Rul. 68-553 and Rev. Rul. 69-449.
Is it possible to get a copy of the SOFA or other multilateral agreement for my location?
Unless you need one of the agreements immediately following World War II, such as the SOFA with Germany or the general NATO agreement, you probably won't be able to find. Many agreements are classified. Recent agreements have never been published. If you need to review your tax situation under a particular agreement, then contact your contracting officer for the person in your organization with the appropriate clearance. You most likely will need to rely on that person's understanding of the agreement as it relates to you.
Qualified Combat Zones
A combat zone is any area that has been designated by an Executive Order from the President of the United States in which the US Armed Forces are engaging or have engaged in combat. The Executive Order usually gives the beginning and ending dates of the Combat Zone designation. Below is an updated list of current Combat Zones:
Arabian Peninsula Area – By Executive Order 12744, the following locations were designated as a combat zone beginning January 17, 1991.
- Persian Gulf
- Red Sea
- Gulf of Oman
- The part of the Arabian Sea north of 10° North latitude and west of 68° East longitude
- Gulf of Aden
- The total land areas of Iraq, Kuwait, Saudi Arabia, Oman, Bahrain, Qatar, and the United Arab Emirates.
Afghanistan – By Executive Order 13239, Afghanistan was designated as a combat zone beginning September 19, 2001.
Kosovo Area – By Executive Order 13119 the following locations were designated as a combat zone and a qualified hazardous duty area beginning March 24, 1999.
- Federal Republic of Yugoslavia (Serbia/Montegnegro)
- Adriatic Sea
- Ionian Sea (north of the 39th Parallel)
Qualified Hazardous Duty Area – Beginning November 21, 1995, a qualified hazardous duty area in the former Yugoslavia is treated as if it were a combat zone. The qualified hazardous duty area includes:
- Bosnia and Herzegovina
Other Combat Zones designated by the Department of Defense:
In support of Operation Enduring Freedom (Afghanistan combat zone):
- Pakistan, Tajikistan, and Jordan, beginning September 19, 2001
- Incirlik Air Base, Turkey, September 21, 2001 – December 31, 2005
- Kyrgyzstan and Uzbekistan, beginning October 1, 2001
- Philippines (only troops with orders referencing Operation Enduring Freedom), beginning January 9, 2002
- Yemen, beginning April 10, 2002
- Djibouti, beginning July 1, 2002
- Somalia, beginning January 1, 2004
In support of Operation Iraqi Freedom (Arabian Peninsula Areas combat zone):
- Turkey, January 1, 2003 – December 31, 2005
- Israel, January 1, 2003 – July 31, 2003
- The Mediterranean Sea east of 30° East longitude, March 19, 2003 – July 31, 2003
- Jordan, beginning March 19, 2003
- Egypt, March 19, 2003 – April 20, 2003
Iraq and Afghanistan Contractors Tax Alert
The IRS has recently issued Memorandum Number: AM2009-0003 dealing with the application to the Foreign Earned Income Exclusion and the Combat Zone Exclusion to Civilian Contractors Working in Combat Zones. It outlines who may or may not be entitled to claim the FEIE.
Contractors working in Iraq and Afghanistan need to keep several things in mind when preparing their tax returns.
While we will not address the issue of employee versus independent contractor which depends on several factors that need to be addressed separately, here are some other things to keep in mind:
- Is you stay for a limited duration or indefinite.
- Do you have a family in the U.S.
- How many days do you spend in the U.S. and "on post".
- Who pays for your lodging and living expenses
First of all, as we highlight earlier on this page, as a civilian you are not entitled to exclude your compensation as “combat pay”. This is only reserved for U.S. service men and women.
Clearly if you work for an employer and receive a W-2, and are on assignment for a limited period of time, say 6 months, you may be able to deduct some away from home expenses as your tax home is in the U.S. But as these are often provided by your employer this may be a moot point.
FEIE Tax Home
Americans who have a tax home outside the U.S. can often exclude a significant portion of their foreign sourced income if they qualify under either the bona fide residence test (which includes being a foreign resident for at least an entire tax year, or 330 out of 365 days physically present outside the U.S. during a consecutive 12 month period).
Bona Fide Residence Test
What if you were outside the U.S. for an entire calendar year (but returned home to visit your family frequently) after which your returned to your house in the U.S. Should not you get the FEIE? Not too fast. Even though you were in, say Iraq, for a year which under Section 162 defined your tax home as Iraq (thus denying you travel, meals and lodging), the IRS probably won’t allow you to deduct the FEIE as a bona fide resident of Iraq. That is because your abode was and still is in the U.S. and Section 911(d)(3) says that even if your tax home is not in the U.S. under 162, because your abode was in the U.S. during that time and therefore could not be in Iraq. Unfortunately there is no Section 911 exclusion as a bona fide resident. As you probably did not pay income tax in Iraq you are subject to tax on your total income back in the U.S.