Overseas Taxes Series: Military contractors and US expatriate tax returns

By ZM Ishmurzina

Members of Armed Forces and military contractors have to file US expatriate tax returns. However, military contractors in Afghanistan and other countries are treated as civilian Americans working abroad. At the same time members of Armed Forces are eligible for numerous overseas tax benefits. We reviewed these tax benefits for armed forces personnel earlier.

Now it is important to understand key differences in overseas tax filing of US expatriate tax returns for military contractors and members of Armed Forces.

Combat zone exclusion

Members of Armed Forces can serve only one or more days in a combat zone to qualify for the exclusion for the entire month. Military contractors are not eligible to claim a combat zone exclusion on overseas tax returns. A list of combat zones is listed on the IRS website.

Foreign Income Exclusion

Military and civilian employees of the US government including members of Armed Forces, United States Armed Forces exchanges, commissioned and noncommissioned officers’ messes, Armed Forces motion picture services, and similar personnel are not eligible to apply for the foreign earned income exclusion on US expatriate tax returns. Going on an assignment for less than 1 year will disqualify military contractors from meeting a physical presence test and establishing a tax home in a foreign country on overseas tax returns.

Status of Forces Agreements (SOFA)

Military personnel can take advantage of Status of Forces Agreements (SOFA) on expatriate tax returns. Per some of these SOFA agreements, US citizens can get an exclusion from taxation in a host country. It implies that a military contractor doesn’t have a tax home in a foreign country. Consequently, these military employees cannot qualify for an exclusion from a host country as well as foreign income exclusion on overseas tax return at the same time.

Tax Return Due Date

Military personnel working overseas on April 15th are eligible for an automatic two-month extension of time to file US expatriate tax returns. However, all tax due must by paid by April 15 to avoid any interest. Penalties will start to accumulate after June 15th. Military contractors who need additional time to file overseas tax returns must file form 4868 by June 15th. This extension is valid until October 15th. If military personnel need additional time to meet the physical presence test, they can request a special 2-month extension by filing form 2350. The IRS must approve this request.

Conclusion

This is a short summary of US tax filing requirements of military contractors. Military personnel who have questions about a physical presence test, foreign income exclusion and overseas taxes must contact an expatriate tax professional that provides international tax services. International tax experts at Artio Partners are here to help you.