Top Five US Expat Tax Tips for Military Contractors
As a military contractor living and working overseas, you’ll find that you’re subject to the same rules as civilian US citizens working abroad in many ways. This includes the requirement of reporting your worldwide income on your US expat taxes, being able to save money using the Foreign Earned Income Exclusion and receiving an automatic filing extension until June 15th. Here are the top five things you should be aware of when it comes to filing expat taxes as a military contractor.
1. Qualifying for the Foreign Earned Income Exclusion
The Foreign Earned Income Exclusion (FEIE) is one of the best ways for Americans abroad to save money on their US expat taxes, as it allows a US taxpayer to exclude up to $101,300 of foreign earned income from their 2016 expat taxes. However, in order to take this exclusion, you must meet one of the following tests:
· Physical Presence Test – You must live abroad for at least 330 days in a 365-day period, which can be any period prior to the filing date of your tax return. This means you can take advantage of additional extensions if you need more time to qualify for this test. Note, if your 330-day period includes only a portion of the tax year, your FEIE will be prorated according to a ratio of number of days in the qualifying period, divided by 365.
· Bona Fide Residence Test – You must establish a permanent residence in a foreign country and maintain it for at least one full calendar year. You must also have an intention to reside in the foreign country for an indefinite period of time. As a contractor, you likely have a set end date to your time abroad, which means you would probably not be able to use the Bona Fide Residence Test to qualify for the FEIE.
2. Your Employment Status Matters
It’s important to understand your official employment status, as it affects your US expat taxes. If you’re self-employed (an independent contractor) or an employee of a civilian business under contract with the military, you will be eligible to qualify for the FEIE. However, if you’re employed by the military, you will not be eligible for the FEIE, though your income may be excludable under different tax rules (learn more below). If you’re a contractor, you’ll receive a Form 1099 at the end of the year, and the income listed will be subject to self-employment tax. This tax is not reduced by the FEIE, but you will be able to deduct business expenses from your 1099 income.
3. Review the Combat/War Zone Exclusion
There are certain IRS regulations in place that allow enlisted military personnel to exclude income they earned in a “combat zone” from taxation, which can be found on the IRS website. It’s important to note that military personnel differ from military contractors, in that contractors are not able to exclude income earned in a combat zone from their US expat taxes.
4. Be Aware of Filing Deadlines
Any US expat who is working overseas on Tax Day (April 18th this year) will receive an automatic two-month extension, making expat taxes due June 15th. You can also request a further extension, making your expatriate taxes due October 16th. You should be aware, though, that any taxes owed are still due on April 18th or interest will accrue until paid.
If you have any foreign financial accounts, you will also need to be sure you file a Foreign Bank Account Report (FBAR) if the total amount of all of your accounts exceeds $10,000 at any point during the tax year. The FBAR deadline is April 18th, but expats automatically receive a two-month extension until June 15th and have the option for a further automatic extension until the October 15th deadline.
5. Understand Your State Tax Obligations
Even if you’re living and working abroad as a contractor, certain states still require you to file state income taxes depending on your ties to the state. If you left the US for an assignment longer than one year and didn’t have any income sourced to a US state during the tax year, you may not be required to file state taxes. However, you may have a filing requirement if you’ve retained a home, family members or a driver’s license in the state.
It’s always recommended that you consult with an expat tax professional to understand your expatriate tax obligations, to ensure you fulfill all requirements and stay compliant with the IRS while living abroad. You can learn more about expat tax requirements on the Greenback blog.
This post was written by David McKeegan, co-founder of Greenback Expat Tax Services. Greenback specializes in the preparation of US expat taxes for Americans living abroad. Greenback offers straightforward pricing, a simple, hassle-free process, and CPAs and IRS Enrolled Agents who have extensive experience in the field of expat tax preparation. For more information about FBAR, expat taxes or Greenback, please visit www.greenbacktaxservices.com.