Most payments received by U.S. Government civilian employees for working abroad, including pay differentials, are taxable. However, certain foreign areas allowances, cost of living allowances, and travel allowances are tax free. The following discussions explain the tax treatment of allowances, differentials, and other special pay you receive for employment abroad.taxmap/pubs/p516-002.htm#en_us_publink100022662
Pay differentials you receive as financial incentives for employment abroad are taxable. Your employer should have included these differentials as wages on your Form W-2, Wage and Tax Statement.
Generally, pay differentials are given for employment under adverse conditions (such as severe climate) or because the post of duty is located in a hazardous or isolated area that may be outside the United States. The area does not have to be a qualified hazardous duty area as discussed in Publication 3. Pay differentials include:
- Post differentials,
- Special incentive differentials, and
- Danger pay.
Certain foreign areas allowances are tax free. Your employer should not have included these allowances as wages on your Form W-2.
Tax-free foreign areas allowances are allowances (other than post differentials) received under the following laws.
- Title I, chapter 9, of the Foreign Service Act of 1980.
- Section 4 of the Central Intelligence Agency Act of 1949, as amended.
- Title II of the Overseas Differentials and Allowances Act.
- Subsection (e) or (f) of the first section of the Administrative Expenses Act of 1946, as amended, or section 22 of that Act.
These allowances cover such expenses as:
- Certain repairs to a leased home,
- Education of dependents in special situations,
- Motor vehicle shipment,
- Separate maintenance for dependents,
- Temporary quarters,
- Transportation for medical treatment, and
- Travel, moving, and storage.
Allowances received by foreign service employees for representation expenses are also tax free under the above provisions.
If you are stationed outside the continental United States or in Alaska, your gross income does not include cost-of-living allowances (other than amounts received under Title II of the Overseas Differentials and Allowances Act) granted by regulations approved by the President of the United States. Cost-of-living allowances are not included on your Form W-2. taxmap/pubs/p516-002.htm#en_us_publink100022665
If you are a federal court employee, the preceding paragraph also applies to you. The cost-of-living allowance must be granted by rules similar to regulations approved by the President. taxmap/pubs/p516-002.htm#en_us_publink100022666
If you are an employee of the American Institute in Taiwan, allowances you receive are exempt from U.S. tax if they are equivalent to tax-exempt allowances received by civilian employees of the U.S. Government. taxmap/pubs/p516-002.htm#en_us_publink100022667
If you are a federal employee who is reemployed by a federal agency after serving with an international organization, you must include in income any reemployment payments you receive. These payments are equal to the difference between the pay, allowances, post differential, and other monetary benefits paid by the international organization and the pay and other benefits that would have been paid by the federal agency had you been detailed to the international agency. taxmap/pubs/p516-002.htm#en_us_publink100022668
See How To Report Business Expenses, later, for a discussion on whether a reimbursement or allowance for travel or transportation is included in your income.taxmap/pubs/p516-002.htm#en_us_publink100022669
If you are a principal representative of the United States stationed in a foreign country, you do not have to include in income the value of lodging (including utilities) provided to you as an official residence. However, amounts paid by the U.S. government for your usual costs of operating and maintaining your household are taxable. If amounts are withheld from your pay to cover these expenses, you cannot exclude or deduct those amounts from your income. taxmap/pubs/p516-002.htm#en_us_publink100022670
If you are a Peace Corps volunteer or volunteer leader, some allowances you receive are taxable and others are not.taxmap/pubs/p516-002.htm#en_us_publink100022671
The following allowances must be included on your Form W-2 and reported on your return as wages.
- If you are a volunteer leader, allowances paid to your spouse and minor children while you are training in the United States.
- The part of living allowances designated by the Director of the Peace Corps as basic compensation. This is the part for personal items such as domestic help, laundry and clothing maintenance, entertainment and recreation, transportation, and other miscellaneous expenses.
- Leave allowances.
- Readjustment allowances or "termination payments."
Taxable allowances are considered received by you when credited to your account.
Gary Carpenter, a Peace Corps volunteer, gets $175 a month during his period of service, to be paid to him in a lump sum at the end of his tour of duty. Although the allowance is not available to him until the end of his service, Gary must include it in his income on a monthly basis as it is credited to his account.taxmap/pubs/p516-002.htm#en_us_publink100022673
These generally include travel allowances and the part of living allowances for housing, utilities, food, clothing, and household supplies. These allowances should not be included on your Form W-2. These allowances are tax free whether paid by the U.S. Government or the foreign country in which you are stationed.