Airline Pilot Taxes 101

Editorial team of TFX

• 08.10.21 • 5 min read

The airline pilot's life looks exciting at first glance: they get a free pass to explore new places and experience different cultures. But what seems like a fun perk can also be a source of suffering. 

Due to complex tax laws, the tax returns filed by airline pilots can reach dozens of pages. Figuring out a pilot's tax liability becomes a year-round job, especially if they are based in or fly to foreign countries.

How are airline pilots taxed?

According to the U.S. tax code, American airline pilots are taxed on their worldwide income, even if they are based abroad. Their tax situation becomes more complex if they fly to foreign countries and over international waters.

This tax headache can be traced to an IRS rule that requires expat pilots to monitor when they are flying over U.S. airspace, foreign territories, and international waters. The IRS contends that money made while flying over international waters does not count as foreign income. 

While an eligible airline pilot may exclude up to $108,700 (for the tax year 2021) of their foreign-earned income, they still need to secure flight plans for every flight they were on to file an accurate tax return.

Furthermore, to qualify for the Foreign Earned Income Exclusion, they must:

• be a U.S. citizen or resident alien

• have a tax home in a foreign country

• meet the Physical Presence Test or the Bona Fide Resident Test

To meet the Physical Presence Test, the person must be physically present in a foreign country for 330 days in a 365-day period. Time spent over international waters does not count towards the Physical Presence Test. The Bona Fide Residence Test may be easier to meet for pilots who are entirely based abroad and have no intention of returning to the United States in the near future.

What is a tax home?

For an airline pilot to qualify for the Foreign Earned Income Exclusion, their tax home must be based in a foreign country. Tax home generally refers to a taxpayer's primary place of work, such as their airport base. For instance, an airline pilot living in London and based in Heathrow Airport can potentially claim the United Kingdom as their tax home.

However, a taxpayer may not claim a foreign country as a tax home if they have an abode in the United States. An abode is defined as where the person maintains "family, economic, and personal ties," without regard for owned property located elsewhere. This means an expat pilot that owns a home in the United States but has started a new life in a foreign country may still claim abode in the said country.

How to compute earned income?

Due to U.S. tax rules, an airline pilot may need to apportion their earned income based on time spent on and over U.S. territories, foreign countries, and international waters. 

An airline pilot's earned income is mostly based on services rendered during block time. The block time begins when the aircraft starts moving away from the gate for departure and ends when it stops at the gate upon arrival. Other required services such as pre-flight and post-flight checks may also be taken into account when apportioning earned income.

To ensure an accurate tax return, the airline pilot must keep track of time spent during the flight and compare the logged time with the actual flight plan. The flight plan allows the pilot to determine the actual time spent flying over international waters or foreign countries.

What can pilots deduct from their income?

Prior to 2018, airline pilots could deduct business expenses from their taxable income. However, the Tax Cuts and Jobs Act which took effect in 2018 removed many of the tax deductions that were available to airline pilots. 

While this poses a burden to pilots who itemize their deductions, it's also important to note that the law also nearly doubled the standard deduction. For the tax year 2020, the standard deduction is $12,550 for those filing Single or Married Filing Separately, $25,100 for Married Filing Jointly, and $18,800 for Heads of Households.

Business expenses

As of 2018, business expenses such as union dues, medical examinations mandated by the FAA, and pilot uniforms are no longer deductible.

Per diem

Airlines typically pay pilots a fixed amount, also known as a per diem, to cover meals and incidental expenses incurred during a trip. Prior to 2018, airline pilots could deduct business expenses that exceeded the per diem they received. While per diem that does not exceed the federal per diem rate is still excluded from taxable income, airline pilots may no longer deduct business expenses over the federal rate.

Airline pilots have to deal with confusing reporting requirements on their tax returns, more so than the average taxpayer. To ensure an accurate return, it's best to ask for expert help from a reputable business tax service.