Expanding the Foreign Earned Income Exclusion (IRC Sec. 911)

Expanding the Foreign Earned Income Exclusion (IRC Sec. 911)

US citizens that are working and living abroad may qualify for the IRC § 911 earned income exclusion. This provision allows eligible individuals to exclude income (up to $107,600 for 2020) from taxation in the US. This does not mean that those individuals are exempt from worldwide taxation, but rather that Congress has allowed US citizens living abroad to exclude some income and housing related expenses. The prevailing wisdom is that the that Congress wanted an administratively simple way for its citizens living abroad and paying taxes abroad to avoid double taxation without having to claim the more time intensive foreign tax credit under IRC § 901.

For years there have been issues between the IRS and contractors, specifically those working in military areas, whether or not they qualify for the requirements of IRC § 911. In particular, the dispute centered on whether those US citizens maintained a tax home abroad. A person can be forgiven for missing the reference to tax home in IRC § 911 since it is nestled in the definition section: “The term ‘qualified individual’ means an individual whose tax home is in a foreign country and” who meets the bona fide residence test or the 330-day test. IRC § 911(d)(1) (emphasis added). Most taxpayers glossed over the first part of this subsection and focused on the bona fide residence test or 330-day test. As a result, the IRS would frequently prevail in court. Harrington v. Commissioner, 93 T.C. at 309 (1989); Daly v. Commissioner, T.C. Memo 2013-147 (2013); Moudy v. Commissioner, T.C. Memo 1989-216 (1989). The only real notable exception was a case where Judge Vasquez ruled that a native Iraqi working as a contractor in Iraq who had strong familial ties to the foreign country had a tax home that was not the US. Eram v. Commissioner, T.C. Memo 2014-60 (2014).

The good news for US taxpayers, specifically military contractors, is that Congress included the following language:

An individual shall not be treated as having a tax home in a foreign country for any period for which his abode is within the United States, unless such individual is serving in an area designated by the President of the United States by Executive order as a combat zone for purposes of section 112 in support of the Armed Forces of the United States.” IRC § 911(d)(3) (emphasis added).

For contractors in areas designated as a combat zone there is no longer a need to prove that their tax home was in the combat zone. This makes it easier to claim the IRC § 911 provided that such individuals meet the bona fide residence test or 330-day test. There is no longer a need to make the argument that their tax home was in a combat zone, since such arguments would strain credulity and often proved futile in Tax Court. Unfortunately for US citizens working on oil rigs in the open ocean though, Congress has yet to provide an equivalent exception to the tax home rule.

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