Hello again mechanic,
The information you were given is not correct. In the US, as an individual you always file your taxes on a calendar year basis. Earnings that you have between January 1st and December 31st of any calendar year must be reported on a tax return for that calendar year.
The physical presence test is not 330 days out of a 365 day year. It is 330 days out of any consecutive 12 month period. This year you will not meet that test since you just went to Afghanistan on November 6th. So when you file your taxes for the year of 2008, you will only have been in Afghanistan a little less than 2 months. But if you finish out your contract and remain in Afghanistan until November of 2009, then when you file your taxes for 2009 you will have met the test, as you will have been in that country for 330 days, even though part of those days were the last half of 2008 -- it is still a consecutive 12 month period.
One thing I would like to add here. Even if you were allowed to file your taxes at the end of your contract as you were told (which you are not), but even then you would still only be allowed one exclusion amount of $87,600. So even though you are going to need to file 2 tax returns (one for 2008 and one for 2009) you will still get to claim the same exclusion on your second return for 2009, so you are still coming out the same. The only difference is that you will be reporting 2 months of your income on the 2008 return and 10 months on the 2009 return.
Filling out the Form 673 does not exempt you from tax on all of your earnings. It only exempts you on the part of your earnings which qualify for the foreign earned income exclusion, which is currently $87,600. Once you reach that limit, any earnings over that amount will have tax withheld.
Here are the exact instructions that the IRS gives to the employer who receives a Form 673 from an employee:
"Once you have received Form 673 completed by the employee, you may discontinue withholding of U.S. income tax on those wages that qualify for the exclusion."
If this was helpful please press the Accept button. Positive feedback is also appreciated.