Last month I was emailing back and forth with a dude who was in a pretty interesting situation. He had sent off his applications and within a pretty quick period, only a couple of weeks, he had landed a phone interview and a decent conditional job offer. Yeah, it was an entry-level position with entry-level pay, mid $80-thousand range in Afghanistan, but it was an easy position with an established company and most importantly, it was a foot in the door. He asked for my opinion and I gave it, but in the end the dude turned down the offer. When I asked him why, he said it was just because the company’s leave rotations would have him home every fourth month, which wouldn’t add up to enough time out of the States to qualify for the Foreign Earned Income Exclusion.
I couldn’t change his mind, which sort of sucks because all that money would have been tax-free if only this guy would have considered taking a month-long vacation abroad!
Today’s lesson is in simple mathematics, so get out your number two pencil and some scratch paper and follow along with me. Ready? Okay, let’s assume that this guy was going to be making $85,000 a year, right? According to the IRS’ 2010 brackets, that level of income for a single person would put him at a 28% tax rate, which means that if he was paid as a contractor and issued a 1099 form then he’d end up owing around $23,800 to the Feds whenever he finally came home and got around to filing a tax return. Ouch! Hope you didn’t already start making monthly payments on that Harley, guy! Sure, you might be able to squeeze in some tax write-offs and you’ll definitely do a lot better if you’ve been setting aside some money for taxes all year long, but it’s easy to see how some civilian contractors can finish up a year or two overseas and still wind up even worse off financially then before they started.
Now, think about this: The 2011 Foreign Earned Income Exclusion says that if you spend 330 out of 365 consecutive days out of the United States, then your first $92,900 of income is exempt from federal taxation. Yes, you might have to drop $500 or so for a tax preparer who’s qualified to handle expatriate tax issues if you want this done right, but that’s still just a small drop in the bucket when you compare it to the possibility of having to pony up $23,800!
With that in mind, ask yourself which option would be cheaper: taking the company’s round trip plane tickets to your home of record during each leave period and getting hit with a huge tax bill at the end of the year, or shelling out a couple thousand bucks up front to take a dream vacation outside the USA so that you can spend enough time abroad to qualify for the Foreign Earned Income Exclusion? Even if you go all out and drop $5,000 or so for a month-long trip, you’ll still end up in a much better place than if you paid your whole tax bill.
Apart from the obvious financial advantages, you should also remember that most people don’t get too much opportunity to travel once their contracting days are done. Most defense contractors rotate people into third-world places by way of major international transit hubs, and from there it’s easy enough to catch a flight to anywhere in Europe or Asia. All it takes is a little effort from your company’s travel representative to make it happen. Even you married guys can benefit from this just by arranging to meet your family in some other country for a month or so. Unless you’ve got to buy plane tickets for your own little Brady Bunch, the cost of airfare is still going to be less than overall your tax bill would be. Also, I’ve noticed that guys who “bring their wives along” to some foreign countries are a lot more likely to get the support they need during their time at work. When you’re planning on working in contracting for any longer than a year, that level of support can make a huge difference.
In the end, though, how you spend your free time is just like any other decision: it’s completely up to you, and no one else can presume to say what’s right for you. I would recommend, however, that you gather as much information as you can, and avoid turning down any solid opportunities before you get the entire picture. You never know, you might be able to save yourself tens of thousands of dollars, and actually have some fun in the process!