close
Share with your friends

United States – Combat Zone Workers and Claiming Foreign Earned Income Exclusion

United States – Combat Zone Workers and Claiming

This report covers a U.S. tax provision that offers tax relief for contractors or employees of contractors supporting the U.S. Armed Forces in designated combat zones.

1000

Related content

flash-alert-2018-132

Earlier this year, U.S. President Trump signed into law the Bipartisan Budget Act of 2018 (the “Act”). Included in the Act is a provision that allows contractors or employees of contractors supporting the U.S. Armed Forces in designated combat zones, who might otherwise not qualify for the foreign earned income exclusion, to claim the exclusion beginning in tax year 2018.

WHY THIS MATTERS

Contractors or employees of contractors supporting the U.S. Armed Forces in designated combat zones may not qualify to claim the foreign earned income exclusion because they maintain an abode within the United States.  However, the change introduced by the Act will provide tax relief for such qualifying individuals.

Background

U.S. citizens and resident aliens may only claim the foreign earned income exclusion if (1) their tax home2 is in a foreign country, and (2) they meet either the bona fide residence test3 or the physical presence test4.  Thus, prior to the enactment of this Act, only individuals with a tax home abroad were allowed to claim the foreign earned income exclusion.  Due to the nature of certain types of business, an individual who does not have a regular or principal place of business will be deemed to have a tax home at the individual’s regular place of abode.  The regular abode of a worker in a combat zone is likely to be his home in the United States.

Section 911 Tax Relief for Combat Zone Contractors/Employees of Contractors

The Act provides an exception to this rule, allowing for individuals working in a combat zone supporting the U.S. Armed Forces to be considered to have a tax home abroad even if they have an abode in the United States.  In order to qualify for this exception, a contract worker must be working in a combat zone.  A combat zone is considered to be any area the president of the United States designates by executive order as an area in which the U.S. Armed Forces are engaging or have engaged in combat, such as the Kosovo area, the Arabian Peninsula, and Afghanistan.5

KPMG NOTE

Under the foreign earned income exclusion, a taxpayer may choose to exclude from U.S. taxable income foreign earned income up to $103,900 for 2018 plus a housing amount that varies with location.  (The exclusion amount for 2019 has not yet been determined.)  

FOOTNOTES

1  For the text and status of the Act, see the Government Printing Office website, click here.  

2  I.R.C. § 911(d)(3); Treas. Reg. § 1.911-2(b).

3  Treas. Reg. § 1.911-2(c).

4  Treas. Reg. § 1.911-2(d).

5  I.R.C. §122(c)(2). Examples of combat zone, IRS Notice 99-30, IRS Notice 2003-21, and IRS Notice 2002-17.

The above information is not intended to be "written advice concerning one or more Federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230 as the content of this document is issued for general informational purposes only.

 

The information contained in this newsletter was submitted by the KPMG International member firm in United States.

© 2020 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.KPMG International Cooperative (“KPMG International”) is a Swiss entity.

Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.

Flash Alert is an Global Mobility Services publication of KPMG LLPs Washington National Tax practice. The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

Connect with us

 

Want to do business with KPMG?

 

loading image Request for proposal