Combat-zone contract workers could qualify for foreign earned income exclusion – it’s the new Law!

Certain U.S. citizens or resident aliens, specifically contractors or employees of contractors supporting the U.S. Armed Forces in designated combat zones, may now qualify for the foreign earned income exclusion.
The Bipartisan Budget Act of 2018, enacted in February, changed the tax home requirement for eligible taxpayers, enabling them to claim the foreign earned income exclusion even if their “abode” is in the United States. The new law applies for tax year 2018 and subsequent years and under this law, the taxpayers can choose to exclude their foreign earned income from gross income, up to a certain dollar amount. For tax year 2018, that dollar amount limit is $103,900.
Under prior law, many otherwise eligible taxpayers who lived and worked in designated combat zones failed to qualify because they had an abode in the United States. The new law makes it clear that contractors or employees of contractors providing support to U.S. Armed Forces in designated combat zones are eligible to claim the foreign earned income exclusion.
The foreign earned income exclusion is not automatic. Eligible taxpayers must file a U.S. income tax return each year with either a Form 2555 or Form 2555-EZ attached. These forms, instructions and Publication 54,Tax Guide for U.S. Citizens and Resident Aliens Abroad, will be revised later this year to reflect this clarification.
What is Foreign Earned Income?
Foreign earned income is the income a taxpayer receives for performing personal services in a foreign country or countries during a period in which he or she meets both of the following requirements:
• His or her tax home is in a foreign country, and
• He or she meets either the bona fide residence test or the physical presence test.
Taxpayers choosing the foreign earned income exclusion cannot take advantage of any other exclusion, deduction or credit related to the excluded income. This includes any expenses, losses or other items that would have been deductible had the exclusion not been claimed. CPA Global Tax (www.cpaglobaltax.com) specializes in international tax issues and will be glad to assist if you have any questions!

Expatriates and new Trade Law

New trade laws were recently enacted after President Obama signed them into law recently.

One of the provisions is affecting child tax credit claimed by certain expatriates. Under the provisions of new law, expatriates claiming foreign earned income exclusion under IRC 911 will no longer be entitled to claim refundable child tax credit. The change is effective from the tax years beginning after December 31, 2014.

Pertinent to note here that IRC 911 exclusion limit for 2015 tax year is $100,800.

Flying over international waters and in U.S.? Flight attendant denied exclusion

Recently in Rogers case, the DC court affirmed the Tax Court’s decision that a flight attendant who performed some duties in and over the U.S. and international waters could not exclude all of her wages under IRC 911 as foreign earned income.

The taxpayer worked as an international flight attendant based in Hong Kong. She performed in-flight duties and some pre-departure and post-arrival work and was generally paid according to her flight time. She received vacation time and benefits, and could receive guarantee pay for work that she would have performed on flights that were canceled. When she received guarantee pay, she was required to remain in Hong Kong awaiting reassignment to another flight. The airline provided the taxpayer with an apportionment of her estimated duty time between minutes spent in or over foreign countries, in or over the U.S., and over international waters. The taxpayer and her husband filed a joint return and excluded all of the taxpayer’s earnings as foreign earned income under IRC 911.

IRS and later Tax Court disallowed the foreign earned income exclusion for the portion of income allocated to her time within U.S. and allowed exclusion only for the flight time that the taxpayer was outside the U.S.

Foreign earned income exclusion is claimed on Form 2555 and the taxpayer must meet either bona fide residence test or physical presence test. There are several exceptions and rules as well as planning opportunities. CPA Global Tax professionals can help you navigate this.