1. CAN CONTRACTORS UTILIZE THE FOREIGN EARNED INCOME EXCLUSION (FEIE) TO EXCLUDE UP TO $100K OF INCOME?Yes – contractors can certainly qualify for the Foreign Earned Income Exclusion (FEIE). However, in general, the nature of contractor employment terms does not allow using the Bona Fide Residence Test. Therefore, civilian contractors working abroad are limited to the Physical Presence Test. Therefore you must closely track your time spent in the U.S. (whether for personal or business reasons) in order to secure the ability to exclude up to $100K from taxable income. Depending on your home state, you may also be able to exclude your earnings at the state level.
2. CAN CONTRACTORS UTILIZE THE FOREIGN HOUSING EXCLUSION AND FOREIGN TAX CREDIT (FTC)?
Generally, no. If the contractor is living on employer provided premises, they simply do not pay out of pocket housing expenses and do not qualify for the Foreign Housing Exclusion.
As far as Foreign Tax Credit (FTC) – U.S citizens abroad are able to utilize any tax paid to a foreign government towards their U.S. tax obligations. However, contractors almost never pay tax in the country of foreign employment, thus they do not have the ability to utilize the Foreign Tax Credit (FTC) mechanism to reduce tax on earnings remaining after exclusion of first $100K.You work in a war zone.3. DON’T IGNORE YOUR STATE RETURNS
Unlike other expats, the biggest, most often ignored, and most expensive issue is that they must always file a State Tax Return unless their home of record is in tax-free U.S. state. Civilian contractors always file as full-year residents of the state that is indicated as their home of record on Form W-2.Civilian contractors with compensation reported on Form 1099-Misc (independent contractors) are also obligated to file state return, even if home of record is not shown on Form 1099-Misc. Most often this is the state where their family (spouse and children) remained. If single, they file state return with the state where they lived and filed prior to working overseas.
Read the full story at: U.S. Contractor Abroad Tax Guide