Is Bahrain Tax-Free for the U.S. Military?

U.S. military personnel serving overseas face specific tax rules. These implications differ from civilians and vary by service location and income type. This article clarifies the tax landscape for service members stationed in Bahrain, addressing federal, state, and local tax aspects.

Federal Tax Exemption for Military Pay

U.S. military members serving in designated combat zones are eligible for federal income tax exclusions on their military pay. Internal Revenue Code Section 112 allows for this exclusion from gross income. Bahrain has been designated as a combat zone for federal tax purposes since January 17, 1991, as part of the broader Arabian Peninsula combat zone. This designation includes the land areas of Bahrain, as well as the surrounding air and sea.

For enlisted members, warrant officers, and commissioned warrant officers, all military basic pay earned while serving in Bahrain is excluded from federal taxable income. Commissioned officers also receive an exclusion, limited to the highest rate of enlisted pay plus any hostile fire or imminent danger pay received for service in the combat zone. This tax benefit applies for any month a service member spends at least one day in the combat zone.

The exclusion is processed automatically; excludable pay should not appear in Box 1 of Form W-2. However, military pay, even if federally excludable, remains subject to Social Security and Medicare taxes.

State Tax Liability

Beyond federal taxes, military personnel must also consider their state income tax obligations. A service member’s state tax liability is primarily determined by their state of legal domicile, established at the time of entry into service and typically does not change due to military orders. The Servicemembers Civil Relief Act (SCRA) ensures military pay is not taxed by any state other than the service member’s state of legal domicile.

Many states offer specific exemptions or do not levy income tax on military pay, especially for residents serving outside the state or overseas. Some states have no state income tax, benefiting service members domiciled there regardless of duty station. Other states may exempt military income entirely or provide substantial deductions. Service members should verify their state of legal domicile’s specific tax laws, as requirements and exclusions vary significantly.

Local Bahraini Taxes

U.S. military personnel stationed in Bahrain are exempt from local Bahraini income taxes on their military pay and allowances. This exemption is established through Status of Forces Agreements (SOFAs) between the United States and the Kingdom of Bahrain. These agreements define the legal status of U.S. forces in the host country, often including provisions for tax and customs duty exemptions on personal effects and official goods.

The SOFA framework prevents double taxation and streamlines administrative processes for military members serving abroad. While military pay is exempt from Bahraini income tax, the agreement may also extend to certain other local taxes. This arrangement simplifies the financial landscape for service members, allowing them to focus on their duties.

Other Income Considerations

While military pay may be exempt from federal and Bahraini income taxes, other types of income received by service members or their dependents remains subject to U.S. taxation. These exemptions do not extend to civilian income earned by a spouse, investment income, or earnings from part-time civilian employment. U.S. citizens are taxed on their worldwide income, regardless of where it is earned or where they reside.

For civilian spouses working in Bahrain, or for service members with other income streams, the Foreign Earned Income Exclusion (FEIE) may be an option for earned income. The FEIE allows eligible individuals to exclude a portion of their foreign earned income from U.S. taxation if they meet specific criteria, such as the Physical Presence Test or the Bona Fide Residence Test. The maximum exclusion amount is adjusted annually for inflation, reaching $126,500 for 2024 and $130,000 for 2025.

However, the FEIE applies only to earned income, such as wages or self-employment income, and does not cover passive income like dividends, interest, capital gains, or rental income. The FEIE is not available for income earned as a U.S. government employee. For foreign taxes paid on unearned income or income not covered by the FEIE, the Foreign Tax Credit (FTC) may offset U.S. tax liability.