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!

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Foreign Earned Income Exclusion – Timing is Everything!

Not many U.S. expatriates realize that the foreign earned income exclusion is an election and is not automatic. In a recent tax court Nancy McDonald learnt this in a painful way when her exclusion was denied. Nancy McDonald V. Commissioner TC Memo 2015-169.

IRC Section 911(a) provides that a qualified individual may elect to exclude from gross income the foreign earned income of such individual. To qualify for the foreign earned income exclusion (FEIE), the taxpayer must satisfy a three-part test:

  1. Taxpayer must be a U.S. citizen who is a bona fide resident of a foreign country for an entire taxable year or physically present in a foreign country during at least 330 days out of a 12-month period, sec. 911(d)(1);
  2. Taxpayer must have earned income from personal services rendered in a foreign country, sec. 911(d)(2); and
  3. Taxpayer’s tax home for the period must be outside of the United States, sec.911(d)(3).

Although a taxpayer may satisfy these three requirements, the opening words of section 911(a)—“At the election of a qualified individual”—make clear that the taxpayer must also affirmatively elect to exclude the foreign earned income from his or her gross income.

Nancy McDonald, a U.S. citizen, left the United States in October 2009 to work overseas. Her Form 1040, “U.S. Individual Income Tax Return”, for that year was due on April 15, 2010. Ms. McDonald did not request an extension of time to file her 2009 return and did not timely file it. The IRS evidently received, from Ms. McDonald’s employer, information about her wages; and in January 2012 the IRS prepared and filed for Ms. McDonald a substitute for return for 2009, pursuant to section 6020(b).

On April 9, 2012, the IRS issued to Ms. McDonald a notice of deficiency (NOD) for 2009 based on the substitute for return. It was determined that there was a deficiency of $19,449 in tax and additions to tax under sections 6651(a)(1) and (2) and 6654.

On May 18, 2012, Ms. McDonald filed her Form 1040 for 2009. The Form 1040 reported income of $101,244, but Ms. McDonald attached thereto a Form 2555, “Foreign Earned Income”, and claimed thereon an FEIE and excluded $23,032 from her total income. With her return Ms. McDonald sent the IRS a payment of $3,018, the balance due reported on her return. The IRS processed Ms. McDonald’s return and payment and closed the first NOD in July 2012.

Subsequently, the IRS selected Ms. McDonald’s 2009 return for audit. As a result of the audit, on June 20, 2013, the IRS issued Ms. McDonald a second NOD, upon which this case is based. The second NOD disallowed Ms. McDonald’s claimed Foreign Earned Income Exclusion because she:

  1. did not make a valid election and file Form 2555 with a timely filed return;
  2. did not elect to exclude the foreign income on a previous return; and
  3. did not otherwise comply with the procedural rules to make a valid election to exclude the foreign income under section 1.911-7(a)(2).

In recent times when number taxpayers are coming forward to catch up and comply with the filing requirements due to FATCA impacts, this case serves as an important reminder as lack of knowledge can be a trap for the unwary. There are ways to avoid such scenarios. CPA Global Tax professionals can help.

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.

UK announces new tax on equity compensation to global employees

UK recently published a draft legislation that the tax treatment of all employment related securities be the same for all globally mobile employees. Accordingly a portion of any equity award paid to such employees should be apportioned to UK income based on the number of UK days in such financial year.

This legislation can create additional costs to the internationally mobile employee and should be reviewed carefully.

Taiwan agrees to FATCA with United States

Taiwan’s Financial Supervisory Commission (FSC) and the Ministry of Finance (MoF), jointly announced their intent to pursue an intergovernmental agreement to facilitate the implementation of the Foreign Account Tax Compliance Act (FATCA) – RIA News.

Taiwan has created an interagency task force, including the FSC, the MoF, the Ministry of Justice and the Ministry of Economic Affairs to study compliance options under FATCA. Previous consultations between the U.S. Treasury and Taiwan were focused on reducing compliance costs associated with FATCA. In addition, efforts have been dedicated to assisting local financial institutions to comply with all the domestic legal requirements and to protecting the depositors as well as the investors.

“The Taiwan authorities are supportive of the underlying goals of FATCA, and are interested in exploring a framework for mutual cooperation to facilitate the implementation of FATCA,” the statement said.
“Both sides affirm their willingness to continue their consultations and actively seek to finalize the signing of an agreement.