A US Tax Filing Guide for American Military Personnel Stationed Overseas

Serving your country overseas comes with its share of challenges, but one you might not expect is navigating the complex world of US taxes. As a member of the US military deployed abroad — one of thousands of Americans working as military personnel supporting US armed forces in combat zones abroad — you’re still required to file US taxes on your worldwide income.

Whether you’re stationed in Germany, deployed to the Middle East, or serving on a ship in the Pacific, understanding your tax obligations is crucial for your financial well-being and peace of mind.

From combat zone tax exclusions to foreign-earned income benefits, we’ll cover the key aspects of filing taxes as a U.S. service member abroad. We’ll clarify the jargon, highlight important deadlines, and reveal potential benefits you might not know about.

Tax deadlines for US service members abroad

When it comes to tax filing deadlines while stationed abroad, the good news is that you often get some extra time to file your annual tax return. However, it’s crucial to understand the specifics to avoid penalties.

Let’s break down the key dates and extensions you need to know:

• Standard deadline: Just like your civilian counterparts, the standard tax filing deadline for military personnel is April 15th. That said, being overseas on this date opens up some additional flexibility, such as…
• Automatic two-month extension: If you’re stationed abroad on April 15th, you automatically get a two-month extension to file your taxes. This means you have until June 15th to submit your return without needing to request an extension formally. It’s a built-in benefit for service members living overseas.
• Additional extension options: Need more time? You can request an additional extension using Form 4868, which gives you until October 15th to file. Remember, this extension is for filing your return, not for paying any taxes owed.
• Combat zone deployment extensions: If you’re deployed in a combat zone, you get an even more significant extension. Your tax filing deadline is automatically extended for 180 days after you leave the combat zone. This extension also applies to hospitalization related to service in a combat zone.

Note: While these extensions give you more time to file, they don’t extend the deadline for paying taxes owed. If you expect to owe taxes, you should still make estimated tax payments by the original April 15th deadline to avoid potential penalties and interest.

Taxable vs. non-taxable military income: What you owe to the IRS

To be able to calculate your taxes, you need to know which parts of your hard-earned military income are subject to taxes and which parts are tax-free.

First up, let’s tackle the income that Uncle Sam wants a share of:

1. Base pay: Just like civilians, your basic pay is taxable. It’s the foundation of your paycheck and, unfortunately, also the foundation of calculating your tax bill.
2. Special pay and bonuses: Did you get a bonus for reenlisting for service? Or extra pay for that specialized skill you’ve mastered? In most cases, these additional payments are also taxable.

Note: There’s a big exception here. If you’re receiving these special pays or bonuses while in a combat zone, they typically become tax-free.

Now for the good news — some parts of your military compensation are off-limits to the taxman:

1. Combat zone pay: When you’re deployed to a combat zone, your income for those months becomes tax-free.
2. Certain allowances and benefits: The military provides various allowances and benefits that aren’t considered taxable income. This includes things like:
   • Basic Allowance for Housing (BAH)
   • Basic Allowance for Subsistence (BAS)
   • Uniform allowances
   • Moving expense reimbursements
   • Family separation allowance

Now, remember our previous mention of combat zone pay? When you’re deployed to a designated combat zone, not only does your regular pay become tax-free, but so does most special and incentive pay.

Foreign Earned Income Exclusion (FEIE) for Military Personnel

The Foreign Earned Income Exclusion (FEIE) is a tax benefit that allows eligible US citizens and residents living abroad to exclude a certain amount of their foreign earnings from US income tax.

However, as military personnel are paid by the US government, this pay isn’t eligible for the FEIE. This exclusion can come into play if the spouse of a service member has employment with an employer other than the US government and is stationed overseas. In this case, the spouse could personally exclude their income, but the service member could not.

To claim the FEIE, you must:

1. Have a “tax home” in a foreign country. For most of you, that’s wherever you’re stationed outside the US.
2. Pass either the Physical Presence Test (spending 330 full days outside the US in a 12-month period) or the Bona Fide Residence Test (living in a foreign country for an entire tax year).

The amount you can exclude from your taxable income. For 2023, it’s $120,000. And get this — it goes up a bit each year to keep pace with inflation, so for tax year 2024, it will be $126,500.

Remember that you can only exclude what you’ve earned from foreign sources up to this limit. So if your foreign earned income is less than the limit, that’s all you can exclude. Also, this exclusion applies to earned income only. That means your wages and salaries are in, but things like interest, dividends, or capital gains are out.

Note: You can’t use both the combat zone exclusion and the FEIE on the same income. However, if you spend part of the year in a combat zone and part of the year in a non-combat foreign post, you might be able to use both exclusions for different parts of your income.

Finally, here’s the million-dollar question (or should we say, the $120,000 question?): Should you claim the FEIE? It’s not always a clear-cut answer. While it can lead to significant tax savings, in some cases, you might be better off with other tax benefits.

For example, if you have dependents or qualify for certain tax credits, excluding your foreign income might actually reduce your overall benefits.

Combat Zone Tax Exclusion

First things first — what qualifies as a combat zone? Combat zones are specifically designated by the President via Executive Order. These areas include active combat zones like certain parts of the Middle East, but also some areas where you might be supporting operations from a distance.

When you’re serving in a combat zone, most of your military pay becomes tax-free. This includes:

• Your basic pay
• Special pays and bonuses
• Even some awards and incentive pays

The combat zone exclusion covers your entire period of service in the combat zone, plus any time you’re hospitalized as a result of your service there. So if you’re injured and spend time recovering, your pay stays tax-free during that period too. It’s the government’s way of saying, “Take the time you need; we’ve still got your back.”

Note that even though your combat pay is tax-free, you want to report it on your tax return anyway. Why? Two words: Earned Income Tax Credit (EITC).

The EITC is a benefit for working people with low to moderate income levels, and it can put a nice chunk of change back in your pocket at tax time. You can choose to include your combat pay as earned income for calculating the EITC. It won’t make that income taxable, but it could boost your credit amount.

Just remember, this is optional. You’ll want to run the numbers both ways to see which works best for you.

State taxes for military personnel abroad

Your “state of legal residence” is the state you consider the permanent home you plan to return to after your service. This is crucial because it’s typically the only state that can tax your military income.

Here’s the kicker: Just because you’re stationed in Georgia or deployed to Germany doesn’t mean you’ve changed your tax residence. When serving in the military, you could be a Texas resident for years without setting foot in the Lone Star State.

This is important to know because many states have special exemptions for deployed military personnel. For example:

• Some states, like Texas and Florida, don’t have income tax at all
• Other states might exempt all of your military income while you’re stationed out of state
• Some offer partial exemptions or special deductions for military members

While you’re globetrotting for Uncle Sam, you might be tempted to change your state of residence. Maybe you’ve fallen in love with a low-tax state. But changing your state residency isn’t as simple as clicking your heels three times and saying, “There’s no place like (insert tax-friendly state here).”

To change your residency:

1. You typically need to establish physical presence in the new state.
2. Show intent to make it your permanent home (get a driver’s license, register to vote, etc.).
3. Cut ties with your old state.

Note: Some states don’t let go easily and might challenge your residency change, especially if they think you’re just doing it for tax reasons. Your best bet? Do some homework on your state’s policies. Better yet, talk with a tax pro who knows state tax issues like the back of their hand. They can help you navigate these waters smoothly.

Special tax forms and reporting requirements

Here’s a table outlining the special tax forms and reporting requirements for military personnel serving abroad:

Form	Purpose	Who needs to file	Key points
Form 1040	Standard U.S. Individual Income Tax Return	All U.S. citizens, including military personnel	• Has military-specific sections• Use to report all income, including military pay• Claim relevant deductions and credits
Form 2555	Foreign Earned Income Exclusion	Military members with spouses who qualify for FEIE	• Used for the spouse to exclude foreign-earned income up to $120,000 (for 2023)• Must meet either the Physical Presence Test or Bona Fide Residence Test
FBAR (FinCEN Form 114)	Report of Foreign Bank and Financial Accounts	Those with foreign financial accounts exceeding $10,000 at any time during the year	• Filed separately from tax return• Due April 15th, with automatic extension to October 15th• Includes bank accounts, securities, and other financial accounts
Form 8938	Statement of Specified Foreign Financial Assets	Individuals with foreign financial assets exceeding certain thresholds	• Filed with Form 1040• Thresholds vary based on filing status and residence• Reports a broader range of foreign assets than FBAR

Remember: The need to file each of these forms depends on your specific situation. It’s always best to consult with a tax professional familiar with military tax issues to ensure you’re meeting all reporting requirements relevant to you.

Navigate your financial future with ease

As we’ve journeyed through the complex landscape of taxes for military personnel serving abroad, one thing becomes crystal clear: your tax situation is as unique as your service. From combat zone exclusions to state tax considerations, the rules can be as varied as the places you’re deployed.

And you don’t have to navigate this tax terrain alone. The experienced team at Bright!Tax specializes in expat taxes, with particular expertise in military tax situations. We understand the unique challenges and opportunities that come with serving abroad.