This is cool.  Luke has cleared up a lot of myths about taxes for contractors, and he is a pro.  He also specializes in preparing taxes for security contractors.  He gave me permission to post this, and feel free to contact him through his email below if you require his services. -Matt

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From CPA Luke M. Fairfield for 2009

Greetings,

For all you ex-teams, ex-pats, special forces, security contractors and operators out there I hope this letter finds you well. In an attempt to keep you current with your tax filings I am sending out this letter as a year end reminder that 2009 is almost over. Feel free pass this email on to anyone in your situation that could use the help or anyone that I missed on this email. As always, I will do my best to keep your tax bill low and offer any relevant advice for your situation.

Based on the most common questions I was asked last year, let me briefly cover the points most relevant to your situation. The following is a rundown of how your tax situation differs from someone working in the states.

1) Generally you will receive $91,400 (for 2009) of your income earned in a foreign country tax free provided that:

a. You were physically present in a country other than the U.S. for at least 330 days out of a 365 day period. This does not have to have been in the 2009 calendar year as a prorated partial exclusion can be obtained by extending your tax return until the 330 day period is up. You will still only file using the 2009 calendar year income but your test period for the physical presence test may run from June 2009 – June 2010.

b. You were a bona fide resident of a country other than the U.S. during 2009. Many of you have received residency Visas from Iraq this year. This is good proof that could be presented to IRS if needed. Filing under this method you will receive an exclusion from income for the ratio of days in the States vs. your foreign tax home.

2) The 673 election… all that filing this form will do is exempt you from tax withholding, it is NOT required to claim the foreign income exclusion contrary to rumor. In 2008 companies began adding to your income the cost of flights provided, incidental and reimbursements. This causes you to be taxed on income that you never received. To regulate tax withholdings, file a W4 with your payroll department and claim a large number of allowances on line 5. Generally between 9 and 15 allowances will have enough withheld to cover your tax bill but you can also write in “exempt” or claim up to 99 allowances to drop withholding to close to zero.

3) Expenses…many of you have changed from working for Blackwater to Triple Canopy or made a similar change from an IC to an IE. There is a vast difference in what can be deducted. As an IC, all expenses related to your work are deductible. As an IE, only expenses required by your employer are allowed as deductions and under audit the IRS will require a letter from your company detailing this. Needless to say, this is impossible to obtain from many of the companies. You can continue to deduct work related expenses as an IE but be aware that deducting too much can quickly put you on the radar.

4) Keep a list of job related expenses, these are deductions for you. This can include travel, meals, weapons, supplies, body armor, computer, auto, telephone, postage, etc. A simple spreadsheet with yearly totals is the best way to provide this to me. See #3 above for a caution if you are an employee.

5) You are generally eligible for an additional extension of tim e to file and pay your taxes. You have 180 days from the tim e you return to the states to file any missing tax returns without penalty if you were in a combat zone. That being said, file on tim e if you can, it keeps you off of the IRS radar.

6) If possible, get an address in a tax free state and use this as your U.S. address. This may save you some money on your state taxes. Tax free states are TX, FL, AK, NV, WA, and TN. This won’t work if you have a house and family in another state so don’t bother. CA is the worst, pay attention if you live here.

7) I am getting a lot of questions about starting S-corps and LLCs for those of you working as ICs. This is a good move in most cases as properly structured it allows you to save about 50% of what you pay in self-employment tax. This is usually about a $7k savings on income of $100k.

Now for Xe (Blackwater), MVM and other ICs working for companies paying you as a subcontractor (1099). Do not forget that the IRS will take 15% right off the top of your net income as self-employment tax. You will also pay regular income tax on the earnings. In addition, the foreign income exclusion of $91,400 does not apply to the self employment tax calculation even though you will get the exclusion in the calculation of income tax. This can result in a very large, very surprising tax bill. Just be aware of this and plan accordingly when saving for taxes.

** For 2009, I am changing the way I bill. Recently my bank began offering ACH Withdrawal service. I will ask you to provide me with your bank account number and routing number (which many of you do already for refund purposes). Once you approve the invoice, I will have the bank auto draft your account for the fee. This will greatly simplify invoicing for me and hopefully you as well. More importantly it will give me more time to focus on tax issues rather than tracking collections. Of course if you would still like to pay by check or Paypal, just let me know and that is fine.

Luke M. Fairfield

Certified Public Accountant

Luke@FairfieldCPAs.com

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Foreign Earned Income Tax from About.com here.

IRS Publication 54 (2009), Tax Guide for U.S. Citizens and Resident Aliens Abroad here.