This month’s newsletter will provide an update regarding a new 2018 law for combat-zone contract workers qualifying for the foreign earned income exclusion.

Before we dive in, however, just a quick reminder of extended due dates for those who have not filed their 2017 returns yet:

• S corporations and partnerships (including LLCs) are due September 17, 2018.
• Individuals and C corporations are due October 15, 2018.

Please send your information to us by September 10th for S corporations and partnerships to ensure we have time to finalize and file.

New law makes clear: Combat-zone contract workers qualify for foreign earned income exclusion

The IRS announced that 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.

Many of you have previously claimed the foreign earned income exclusion when we successfully established that your “abode” was outside of the United States and you qualified under the physical presence or bonafide residency test. Under the new law, establishing a foreign “abode” may no longer be a requirement for those in combat zones. The new law applies for tax year 2018 and subsequent years.

This means that these taxpayers, if eligible, will be able to claim the foreign earned income exclusion on their income tax return for 2018 when they 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 taxpayers must file a U.S. income tax return each year with either a Form 2555 or Form 2555-EZ attached.

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.

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.

Please let us know if you have any questions about the new law or your specific eligibility for the foreign income exclusion benefit in 2018.

Thank you! We look forward to serving you again in the future!