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A contractor in Kuwait or Iraq who misses the IRS time abroad test by one day loses the exclusion for that 12-month window.
We handle overseas contractor taxes for W-2 and 1099 contracts, plus returns for diplomats and service members posted abroad.
Yes. The IRS taxes US citizens on pay earned anywhere, including on a base abroad.
A private contractor with a tax home abroad can exclude up to $132,900 of 2026 pay after meeting an IRS test for time abroad.
Diplomats, federal civilians and service members cannot exclude their US government pay, because it is not foreign earned income.
The IRS treats US government employee pay differently from private contractor pay for work abroad. With the foreign earned income exclusion (FEIE), a US citizen working abroad can exclude qualifying foreign wages from taxable income.
| Your role | FEIE | What we check |
|---|---|---|
| Private contractor, W-2 | Yes, with a foreign tax home and time abroad test | Combat zone abode rule and leave days |
| Self-employed contractor, 1099 | Yes, for income tax | Business profit and estimated payments |
| Diplomat or federal civilian | Not on US government pay | Which allowances are tax free |
| Service member | Not on military pay | Combat zone service |
We ask this first, then check work location and foreign tax paid to choose the forms and credits.
Yes. The combat zone tax exclusion under 26 U.S.C. 112 is limited to US Armed Forces members. A contractor can claim the FEIE instead, up to its annual cap, once the tax home and time tests are met.
Since the 2018 tax year, the IRS ignores a US abode while a person serves in a combat zone in support of the Armed Forces, under 26 U.S.C. 911(d)(3). Abode is the IRS term for where family, economic and personal ties are.
A contractor can keep a house and family in the United States and still meet the FEIE tax home test for those months.
The contractor still needs 330 full days in foreign countries within 12 consecutive months, or a full tax year as a bona fide resident abroad.
How home leave fits inside 330 days:
We map that window against the rotation dates, so the contractor knows the leave budget before booking flights.
Where 330 full days come from
| 330 full days abroad | 330 |
|---|---|
| 35 days for leave, transit and partial days | 35 |
| 365 days in a 12-month window |
Illustrative: one 12-month window, no leap year, all remaining days spent fully abroad.
If you have a tax question, whatever the least appealing answer would be, that's probably the right answer.
The IRS lists Kuwait in the Arabian Peninsula combat zone, designated by Executive Order 12744 from January 17, 1991.
The IRS puts Iraq, Saudi Arabia, Oman, Bahrain, Qatar and the United Arab Emirates in the same zone, along with the Persian Gulf, the Red Sea and nearby waters.
The IRS treats contractor work there in support of US forces as combat zone service for the FEIE abode rule.
The IRS also extends filing and payment deadlines for civilians serving in a combat zone in support of the Armed Forces. The extension covers the time there, plus 180 days after leaving, plus any filing days left when service began.
US forces operate in Kuwait under the US-Kuwait Defense Cooperation Agreement, signed September 19, 1991, which remains in effect. A contractor with no Kuwaiti income tax on wages has no foreign tax to credit on that pay and can claim the FEIE once its tests are met.
Send the contract and any letter of authorization, and we confirm which months qualify before we file.
Send the rotation dates and we count full days abroad for the current 12-month window.
Dates only, no tax documents at this step.
Through our government contractor tax services, we cover the contractor from the first rotation year through the move home.
We prepare Form 1040 with Form 2555 for the FEIE, or Form 1116 to claim a credit for income tax a host country charged.
A 1099 contractor owes self-employment tax on net profit even with the FEIE, unless covered by a totalization agreement. We prepare Schedule C, Schedule SE and quarterly estimated taxes.
We file the FBAR, FinCEN Form 114, for any year your combined foreign balances exceed $10,000 at any point.
Contractors who stopped filing abroad can catch up through the streamlined offshore procedures when the missed filings were not deliberate. We prepare the late returns and FBARs as one project.
We also check state residency, since taxes for overseas contractors can include a state return.
US diplomats still owe US federal income tax on their salary wherever they serve.
The IRS treats certain cost of living allowances abroad as tax free under Publication 516, while it taxes post differentials and danger pay. Foreign Service officers and Defense or State Department civilians follow the same split.
Send two years of leave and earnings statements after the first call, and we flag any allowance taxed in error.
Under Article 34 of the Vienna Convention on Diplomatic Relations, diplomats are exempt from host country taxes. Exceptions are limited to items such as sales taxes built into prices and tax on private income earned locally.
Yes, on basic pay, with an exception for months served in a combat zone.
Under the IRS rules for the combat zone tax exclusion, enlisted members and warrant officers exclude all military pay for each month in a combat zone. Commissioned officers exclude pay up to the highest enlisted rate plus imminent danger or hostile fire pay.
The IRS counts by month, so a member who serves one day in a combat zone excludes that month's qualifying pay.
Spouses keep a state choice. Under 50 U.S.C. 4001, a service member and spouse can elect the member's residence, the spouse's residence or the permanent duty station for state tax.
Households with combat zone months, a spouse's foreign wages and a state election in one year need a military CPA. Dimov Tax works as the military tax accountant for the household and reviews both spouses' returns together.
To pick the best tax service for American military contractors abroad, ask each firm two questions before sending documents:
Will the firm test the 2018 combat zone abode rule and the 330-day count against the rotation dates?
Can one preparer handle contractor pay, government pay and a spouse's local wages together, when the IRS applies a different rule to each?
E-filed by Dimov Tax in 2024.
A credentialed reviewer on every return.
Our reply window for client emails.
They helped me complete my tax returns after being overseas for 30 years and were very helpful with my international investments. Xintian specifically was excellent with communication and advice.
We price overseas contractor taxes by the forms the year needs and send a fixed quote before work starts, based on:
The lightest file is one W-2 contract, one federal return and one FBAR. These are the factors, not a quote.
If the first consultation ends early, we credit the unused time toward the return.
We build tax help for offshore contractors around two documents: the contract and a day-by-day travel calendar.
A senior team member or Enrolled Agent goes through the contract and pay sources by phone.
We count full days abroad, mark combat zone months and compare the FEIE with the foreign tax credit.
We prepare the federal return, the FBAR and any state return, then walk through them with you before you sign.
We e-file and post each filed form to the secure client portal.
We open the encrypted client portal for uploads after the first call.
We file late returns, amend past ones and set up the current year's overseas contractor taxes in the same review, at any point in the rotation.
