If you’re a contractor who is living abroad, you might be happy to hear that recent tax home changes have made the path to qualifying for the Foreign Earned Income Exclusion (FEIE) easier for foreign contractors and military contractors living abroad. Read below to find out more.
Using the Foreign Earned Income Exclusion
Working outside of the US is often painted as a fantastic tax-saving opportunity since you can use the FEIE to avoid tax on the first $105,900 of income for 2019. However, the tax code does not make it so simple. When the FEIE was introduced, it was not designed to incentivize people to work abroad. Instead, it was designed to shelter those living outside of the country from double taxation.
The IRS made this clear at the end of 2017 when the IRS stated the FEIE wouldn’t be usable for any years in which you maintain an abode in the US. An abode is your primary home and place you intend to return to after a period of absence. Having a home in the US does not create a dwelling, so other factors such as your personal ties, family, and financial connection are essential. So, for example, if an expat were to take a job assignment for two years in Mexico while maintaining an apartment in the US, the IRS would look at their personal connections and financial connections to see if most of the signs point to the US. If so, then the exclusion is an option. However, if they had some of these connections in Mexico, then there might be a debate. The point here is that exclusion isn’t an option for a person with a US abode with one exception.
Tax Home Changes for Military Contractors
Recently, in the Bipartisan Budget Act of 2018, tax home requirements were changed for eligible taxpayers, allowing them now to claim the FEIE even if their “abode” remains in the US. The new law is applicable for the tax year 2018 and going forward.
The tax code has made it clear people supporting the military in designated combat zones aren’t considered to have an abode in the US. So, the IRS ignores having a home in the US and a closer connection to the US in these instances. The only thing that military contractors need to do is ensure that they meet the physical presence test, which is spending 330 days out 365 days outside of the US. The bona fide resident test requires that they establish a closer connection to a foreign country, which can be quite hard to in a combat zone. The brave men and women that serve alongside our armed forces are allowed fantastic tax-saving opportunities. The same can’t be said for all others.
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