If you are a U.S. citizen or resident alien of the U.S., 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 of $103,900, which is an exclusion of monies earned from being taxed by the IRS each year. This is a big windfall for individuals working overseas, but not living overseas!!!
The background was first laid out in the Bipartisan Budget Act of 2018, which 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.
This means that you, if eligible, will be able to claim the foreign earned income exclusion on your income tax return for 2018 when file file. Under the exclusion, 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.
The foreign earned income exclusion is not automatic. Eligible individuals must file a U.S. income tax return each year with form 2555 or 2555-EZ to be attached to a “timely filed” tax return. But even if the return is late, we can help you keep that exclusion.
Under prior law, many otherwise eligible individuals 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. Individuals 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.
As in the past, the foreign earned income exclusion is not available to federal employees or members of the military. But service members in combat zones continue to qualify for the combat pay exclusion.
This a complicated but highly beneficially area of the tax law, call us to help you understand your options and, if you wish, prepare your tax returns with all of the proper benefits and elections to help you take advantage of this very important piece of tax legislation.
Michael B. Nelson, Esq.