If you work for a US contractor abroad, taxes can be confusing. Regardless of where they live, those with overseas contractor jobs will need to file a US tax return — but they may need to file taxes in their country of residence as well.
But with a little bit of research and organization, you’ll feel more comfortable with what your taxes include and how to handle them. You may even be able to reduce what you owe by learning about and claiming exemptions, exclusions, deductions, and other tax breaks.
We’ve put together a guide for those with overseas contractor jobs, whether they have overseas civilian contractor jobs like US pack contractors or work as US government contractors, such as US defense contractors or US military contractors. Read on to learn about your tax obligations, how to pay them, and how to reduce your tax liability.
1. Federal & State Tax Obligations
All Americans living or working abroad — whether they have overseas contractor jobs or not — must file a US federal tax return each year. The good news, though, is that they are eligible for an automatic filing extension until June 15th, which can be extended still further if necessary until October 15th. However, this extension is only for the return itself — you still have to pay estimated taxes by April 15th.
Depending on which state your last tax home was in, you may have to file state taxes each year as well.
2. Foreign Tax Obligations
If you reside in a foreign country, you may need to pay taxes to their government as well. This, however, will depend on factors like how that particular country defines residence, what kind of visa you have, and whether or not that country has a tax treaty with the US. The good news is, though, there are a few different tax breaks available to Americans abroad that can help them avoid paying taxes on the same income in two different countries.
3. Tax Breaks
A couple of the most well-known tax breaks for Americans abroad, regardless of whether they’re working for a US contractor or not, are the Foreign Tax Credit (FTC) and the Foreign Earned Income Exclusion (FEIE). In some cases — for example, if you earn over $100,000 and you pay foreign taxes abroad — you may even be able to claim both.
The Foreign Tax Credit
The FTC allows Americans abroad to subtract what they have paid in taxes to a foreign government from what they owe in taxes to the US government. This is an especially good option for those who live in a country with a higher tax rate than it is in the US. To qualify, foreign taxes must be:
- Based on income
- Charged to you specifically
- Legal and actual
To claim this credit, you must fill out Form 1116 and attach it to your Form 1040.
The Foreign Earned Income Exclusion
The FEIE allows Americans abroad to exclude a certain amount of their income from taxation (in 2023, that figure is $120,000). To qualify for it, you must either be a bona fide resident of another country with the documentation to back it up or have spent at least 330 full days in the tax year outside the US (known as the physical presence test). You can claim this credit by filing IRS Form 2555 along with your Form 1040.
The Foreign Housing Exclusion & Deduction
Anyone who qualifies for the FEIE can also write off reasonable housing expenses (like rent, utilities, and necessary repairs) under the Foreign Housing Exclusion. To claim it, you’ll have to claim the FEIE (via IRS Form 2555, as mentioned above), making sure to fill out the portions relevant to the FHE and attach it to your Form 1040.
Read More: Filing IRS Form 2555 – A Guide For Expats
4. Combat Zone Tax Benefits
For many years, people with military contractor jobs overseas that owned homes in the US were not able to claim the FEIE, even if they worked in a designated combat zone. As of 2018, however, they have been able to, provided that they pass the bona fide or physical residency test.
The IRS also allows enlisted military personnel to exclude income earned in a combat zone from taxation using the Combat Zone Exclusion. Income from any month where at least part of the time was spent working in a combat zone is exempt from US federal tax, unless:
- You were there voluntarily
- You were only traveling from one non-combat zone to another
However, note that “military personnel” refers specifically to people who are enlisted in and employed directly by the US military — meaning those with overseas contractor jobs are not included.
5. Foreign Financial Accounts & Assets
As an American living abroad, you may be on the hook for more than just federal income taxes. For example, if you have one or more foreign bank accounts or foreign investment accounts with a combined total of $10,000 or more between them at any time during the tax year, you are required to file a Foreign Bank Account Report (FBAR) alongside your tax return using FinCEN Form 114.
And if you have $200,000 or more in foreign, non-tangible assets on the last day of the tax year — or $300,000 or more at any time in the tax year — you will have to file Form 8938 as well. Keep in mind that this only includes non-physical assets, such as accounts, investments, and businesses.
Taxes Made Easy for Overseas Contractors
Hopefully, this article gave you a better understanding of what those with overseas security contractor jobs can expect when it comes to taxes — but as you can tell, it’s a complex topic. If you need somebody to help you navigate your taxes or even walk you through them step-by-step, you can count on the team at Bright!Tax.
We’ve helped Americans living abroad in over 200 countries with their taxes — get in touch today to learn how we can help you!