The Bipartisan Budget Act of 2018 eases the requirements for combat-zone contractors to claim the foreign earned income exclusion. A U.S. citizen is generally taxed on his worldwide income. The foreign earned income exclusion, however, allows a taxpayer to exclude foreign income from his gross income for U.S. tax purposes, up to a certain dollar threshold. For 2018, the threshold is $103,900.
But the exclusion only applies to a taxpayer whose tax home is in a foreign country. Under prior law, a taxpayer could not have a tax home in a foreign country if his “abode,” which is generally his home or residence, was in the U.S. See Tax Court Broadens Foreign Earned Income Exclusion. Before the Bipartisan Budget Act of 2018, combat-zone contractors had difficulty qualifying for the foreign earned income exclusion because it was difficult to prove their abodes were not in the U.S. The new law removes the “abode” requirement by providing that a contractor who supports the U.S. Armed Forces in a combat zone is entitled to the foreign earned income exclusion even if his “abode” is in the U.S. The new law went into effect in 2018. This is a significant development for contractors supporting the military overseas.
For more up-to-date coverage from Tax Controversy and Financial Crimes Report, please subscribe by clicking here.