War Zones and Military Contractors
Working in a war zone or or otherwise providing services as a civilian under government contract may provide certain host country tax benefits. At the same, tax breaks available to most US expats living abroad may be limited. Civilian employees are subject to quite different tax rules from military personnel and non-uniformed government personnel. Please note that this web site only covers the tax laws applicable to US civilians.
Can I treat a hardship premium or danger pay as excludible combat pay?
No. Combat pay is paid by the government to soldiers. See related FAQ on this page for further information.
Often, individuals initially minimize US travel so that the exclusions can be claimed using the physical presence test. Once the qualifications of BFR have been met, less attention is needed to the number of days in the states. See our PPT page for information on how to qualify under this test.
When is my tax return due? Do I have special fling deadlines because I was working in a war zone? Am I 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. The exemption from interest and penalties is for government employees, not civilians. We continue to have reports that calls to the IRS result in a wide range of answers on this topic (which is beyond the scope of their phone service.) Consult your tax adviser for further information.
I went to work in a war zone. Do I automatically qualify for the foreign earned income exclusions?
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 I claim the foreign earned income exclusions even though I am 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 I am 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.
How can I 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 no longer seem to be unclassified. 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.
- Qualifying for the Foreign Earned Income Exclusions
- ►General Questions
- ►Physical Presence Test
- ►Counting Days in the US, Abroad and Traveling
- ►Bona Fide Residence
- ►War Zones and Military Contractors
- Income and Social Tax Withholding
- ►Social Security and Medicare Taxes
- ►Income Tax Withholding
- ►Hypothetical Tax
- ►Totalization Agreements
- ►Due Dates and Extensions
- ►Expatriate Tax Forms
- ►IRS Addresses
- ►Other Resources