Being an engineer or defense contractor comes with plenty of perks¾high salaries, specialized benefits, and opportunities to work on cutting-edge projects. But these advantages also bring unique tax challenges. Below, you’ll find some actionable tax strategies to help engineers and defense contractors maximize their income and minimize tax burdens.

Understanding Your Income and Tax Brackets

High salaries often place engineers and defense contractors in upper tax brackets. However, understanding how tax rates work can help manage liabilities. It’s important to understand the marginal tax rate, which is the tax rate applied to your next dollar earned. Think of marginal tax rate like a staircase: as your income rises, you move up to higher steps with higher tax rates. Each step only taxes income within that specific bracket.

There is also the effective tax rate. This reflects your total tax paid as a percentage of your income. Bonuses, overtime, and project-based income can unexpectedly bump you into a higher tax bracket.

Strategy:

  • Defer income: Delay end-of-year bonuses or negotiate special project payments across tax years.
  • Contribute to Pre-Tax Accounts: Max out your 401(k) or HSA contributions to reduce taxable income.

Maximizing Employer Benefits and Tax-Advantaged Accounts

Engineers and defense contractors often have access to robust employer benefits that can double as tax-saving tools. They can utilize retirement accounts like 401(k) plans, Roth IRAs, and Thrift Savings Plans (TSP) for tax-deferred or tax-free growth. There are also health savings accounts (HSA) and flexible spending accounts (FSA) that allow you to cover medical expenses with pre-tax dollars.

Strategy:

  • Max out contributions: For 2025, contribute up to $23,500 in your 401(k) or TSP if under 50.
  • Leverage HSAs: Contributions are tax-free, grow tax-free, and can be withdrawn tax-free for qualified medical expenses.

Navigating Tax Deductions and Credits

Engineers and defense contractors may qualify for several deductions and credits. There may be options to deduct student loan interest and claim education credits like the lifetime learning credit. Professional certifications, union dues, and job-related education may be deductible.

Strategy: Track expenses by maintaining detailed documentation of work-related expenses and review IRS guidelines regularly.

Tax Implications of Security Clearances and Overseas Work

Working with security clearances or on overseas contracts presents unique tax challenges. Security clearance restrictions may limit foreign investments or bank accounts. However, with overseas work, you may qualify for the foreign earned income exclusion (FEIE). This exclusion allows you to exclude up to $126,500 of foreign earned income on your 2024 taxes.

Strategy:

  • Track International Workdays: If you meet the physical presence test (330 full days abroad in 12 months) or the residency test (full tax year in a foreign country), you may be able to exclude significant income from U.S. taxes.
  • Use Tax Treaties: Understand international tax treaties to avoid double taxation.

Capital Gains and Stock Options

Many engineers receive stock options or restricted stock units (RSUs) as part of their compensation package. Incentive stock options (ISOs) vs. non-qualified stock options (NSOs) have different tax treatments. Holding stocks for over a year qualifies for lower long-term capital gains tax rates.

Strategy:

  • Time stock option sells carefully to avoid short-term capital gains taxes.
  • Employee Stock Purchase Plans (ESPPs): Understand the tax benefits of holding shares longer to minimize tax liabilities.

Charitable Giving and Philanthropy

Charitable contributions support good causes and provide tax savings when planned strategically. Donating appreciated stock may help to avoid capital gains taxes and deduct the full value. With donor-advised funds (DAFs), you may be able to bundle multiple years’ worth of donations into one tax year for a larger deduction.

Estate Planning and Wealth Transfer

Higher income professionals should consider estate planning to minimize future tax liabilities.

The estate tax exemption is $13.99 million in 2025. Likewise, the annual gift exclusion allows a gift up to $19,000 per recipient in without triggering gift taxes.

Strategy:

  • Use Trusts: Set up trusts for asset protection and tax efficiency.
  • Review Beneficiaries: Ensure designations on 401(k)s, IRAs, and life insurance are up to date as they typically override wills.

Tax planning doesn’t have to feel like navigating an obstacle course. Leveraging tax-advantaged accounts, deductions, credits, and strategic income management, may help engineers and defense professionals keep more of their earnings while staying compliant with tax laws. To learn more about options, consult a tax professional or financial advisor at Investor’s Resource.

Investor’s Resource, RFG and PCS do not offer tax or legal advice, and to always consult a tax or legal professional regarding an individual’s specific situation.

Facebook Linkedin Youtube

Investor’s Resource, a greater Huntsville Alabama financial advisor, delivers expertise in family planning, including portfolio management, retirement planning, and risk management.

Securities offered by Registered Representatives through Private Client Services, Member FINRA/SIPC. Advisory Services offered by Investment Advisory Representatives of RFG Advisory, LLC., a registered investment advisor.  Private Client Services, Investor’s Resource and RFG Advisory are unaffiliated entities.