2555 Help Husband working in Iraq

[joans]

I have a question. My husband is working in Iraq, not in the military, but for the military on a marine base. He left on Sept 21, 2008 and has been home 2x totally 28 days so far. He is coming home again on 9/8 which will put him over his 35 days allowed to be "in country" for tax purposes. Question is: Would total income be taxable or just the days that he is over on allowable days. I have to read pub 514, I believe that is the one. Also, is there special circumstances if it is classified a "warzone" Any advice would be appreciated as I have never done one of these and want to make sure I do it right especially considering it is ours:)

Sara

PS. We are close enough to go to Canada if need be to be out of the country to qualify for the Foreign Tax Exclusion.

[jainen]

>>qualify for the Foreign Tax Exclusion<<

You need to go see a tax preparer. I don't think you are going to like his answers, but they are going to save you trouble overall.

There is no such thing as a Foreign Tax Exclusion. There's a Foreign Earned Income Exclusion, but it doesn't have anything to do with Canada unless that's where the income is being earned, and it doesn't apply to military employees in any case. There is a Foreign Tax Credit, in case you do earn something in Canada and pay Canadian tax on it. I don't know what you mean by "his 35 days allowed to be in country for tax purposes" but I'm sure the payroll clerk on base can explain what is and what is not on his W-2.

[Lion EA]

Hey, Jainen, Sara is one of us trying to learn about a new-to-her tax situation because it's her husband's/her own now. She is reading and listening and knows she "needs to go see a tax preparer." That's shy she's posting here. She could use some guidance from someone who's familiar with civilian employees for our military in Iraq. (I'm not that person, but someone/some people on this board probably are.) If you could help her focus her reading and if our experts in this situation would jump in, Sara will develop a new area of knowledge helpful not only to her but to her clients as well.

[jainen]

>>help her focus her reading<<

The post was up here for two days without any response, an unusually long time that suggests this board does not have specific answers for her. She already plans to get Pub 514, the most focused read available for non-specialists. It is pretty technical compared to many other IRS pubs, and because she is missing on fundamental concepts and vocabulary I recommend she start in-person with a knowledgeable tax office. And I recommend she start at the source for interpreting the W-2.

[joans]

I have printed pub 3, pub 516. They are somewhat conflicting. If in a "warzone" some of the wages are prorated to be exempt. I realize that I have only been preparing taxes for 3 years and really new at this, but I was hoping some that have been preparing taxes for 20+ years have done 2555 and would have some advice on the matter.

[joans]

Hey, Jainen, Sara is one of us trying to learn about a new-to-her tax situation because it's her husband's/her own now. She is reading and listening and knows she "needs to go see a tax preparer." That's shy she's posting here. She could use some guidance from someone who's familiar with civilian employees for our military in Iraq. (I'm not that person, but someone/some people on this board probably are.) If you could help her focus her reading and if our experts in this situation would jump in, Sara will develop a new area of knowledge helpful not only to her but to her clients as well.

Thanks Lion:

I appreciate the vote of conifidence. This board has helped me on so many different scenarios the past 3 years and I have learned so much. I am doing some digging on this matter and am finding conflicting information. I will call the IRS to get the "official" position and get it in writing if I can to CYA in case it comes back to haunt me:)) Thanks again.

Sara

[Lion EA]

Before I'd rely on the IRS, I'd check with a group you belong to such as NAEA or NATP. Especially if you have a local chapter so already know which preparers might have similar clients. Jainen's suggestion to see a tax preparer is a good one. You need to find someone who you can sit with face-to-face or talk on the telephone or chat/IM in real time who prepares returns for civilian employees of the military overseas, in and out of war zones. They might mentor you for free, but even if you pay them for their time and oversight you'll get value for your money on your own return and develop a new niche for business. Start with who hired your husband; ask if he's heard where employees get their returns prepared. Have your husband talk to his new co-workers to ask the same question. Also, look for courses, probably online or pre-recorded, on the topic. Do searches on other message boards. Good luck to your husband and to you.

[joans]

I have looked on Dangerzonejob.com and called the IRS and basically, they all say that he has to be physically out of the country for 330 days or all of his wages are taxable:( So it looks like we are going to Canada for a week on "vacation". But I will keep on checking to see if I can find out more information. Thanks for the suggestions.

Sara

[jainen]

>>My husband is working in Iraq, not in the military, but for the military on a marine base<<

Foreign earned income exclusion does not apply to civilian employees of the military.

[joans]

Yep - that's what we finally got figured out. So off to Canada we go for a week to qualify for the tax exclusion:)) Camping in Thunder Bay:)

[mcb39]

Sara, I don't understand how you figure that a week in Canada is going to qualify you for non-taxable income. Matt won't be working in Canada. I hope that you really are aware of what you are doing and what the results might be.

[kcjenkins]

I'm guessing she means he will stay out of the states so as to not have too many days "in country".

[joanmcq]

But if the foreign earned income exclusion does not apply to civilians working for the US military (which I believe jainen is correct on), then the number of days out of the country does not matter. He doesn't qualify, period.

[Lion EA]

The Summer 2009 issue of Taxpro Journal by NATP has an article on The Foreign Earned Income Exclusion and Form 2555 and includes an example with the corresponding filled-in form. It reinforces what Jainen told you. Boldface in the Taxpro article: "Foreign earned income does not include pay the taxpayer receives as an employee of the U.S. Government or an of its agencies."

[kcjenkins]

That is correct, I was just trying to explain what she meant about Canada. I agree, given his job, it's not relevant in this case.

[joans]

Now I am totally confused. My husband has been working in Iraq since Sept 2008. He should not have to pay taxes on that money as long as he is out of the country for 330 days of 365 days. That was one of the benefits of him working overseas. He is working for a company that was awarded a contract from the government to work on military bases doing construction/maintenance. He has been home for 28 days since Sept 21, 2008. Am I way off base on this or am I explaining myself wrong again?

[kcjenkins]

OK, here's the deal. IF he is working "as an employee of the U.S. Government or of one of its agencies" then the exclusion does not apply. But if he is working for a business, then the fact that the job is on a military base is not relevant, and he can use the exclusion. You confused us about whether he was a government employee and that led to us thinking that he could not take that. Enjoy your Canadian vacation.

[TAXBILLY]

Sara:

So that we can finally nail this down, does your husband receive a wage from the U.S. government or a contractor?

taxbilly

[joans]

My husband works for KBR which was awarded a government contract. He does not work for the government. I am excluding all his wages on the 2555 for 2008 and will have to figure out 2009 when it comes around. This whole thing is so confusing it makes me want to scream. By the way, Thunder Bay, Ontario is gorgeous if anyone wants a nice vacation. Only 1/2 hour over the border, the drive up follows Lake Superior all the way up and the scenery is breathtaking. But watch out for the Moose Crossing signs. Kinda freaks you out:)

Sara

[Hahn1040]

The qualifying rules for the foreign earned income exclusion are very specific. It is an all or nothing qualification.

The first thing to consider is that he does not work for the federal government. If he works for a private company that contracts with the federal governement that is fine.

One must first meet the tax home test. His tax home must be in a foreign country.

Once that is met, then there are two ways to qualify:

1. bona fide residence. Very likely your husband would not qualify under this rule. He does not maintain a permanent home in the foreign county.

2. physical presence: this is where the 330 days in a 12 month period applies. The 12 month period does not have to be a calendar year. Thus, his 12 month period can be from 9/1/2008- 8/31/2009. As long as he meets the 330 day requirement, he can qualify for both 2008 and 2009. If he does not meet the 330 days in a foreign country, then all of the foreign earned income is taxed.

If you read through the instructions for form 2555 they are pretty straight forward.

I find the problem is with getting the program to put the figures in where I want them

The partial exclusion applies only to the max that can be excluded:

example: you have determined that you have met the physical presence test. To figure the exclusion:

your qualifying 12 months is 9/08- 8/09

for 2008 the number of days of your qualifying period during 2008 is 90. Thus you can exlcuded up to:

90/366 x $87,600= $21,541. If the foreign earned income is less than this amount, then all of it can be excluded. IF it greater than this, then the amount above $21,541 is not excluded.

for 2009 the number of days of your qualifying period during 200 is 245. Thus you can exlcuded up to:

245/365 x $87,600= $58,800 ( I don't know if the max changes for 2009 and I did not take the time to look it up)

I hope this answers your questions.

[joans]

Thanks. It does help quite a bit:) I have started entering the days in and out of country on the 2555 and yes I am having problems with the info carrying over. My husband did receive a w-2 from the company and it is a straight forward W-2. No special codes and he does qualfy for the exclusion with all his wages as he is under the maximum. I have a feeling 2009 might be even more fun trying to figure this out:) I really do appreciate the help:) Your example has made this clear and I have learned a lot researching this subject:) Thank you again.

Sara

[Lion EA]

We were trying to get you to turn around your thoughts from "35 days in this county" to 330 days in the country where he's earning the income he'd like to exclude. He can leave Iraq for only 35 days in a 365 day period to go to the US or Canada or Timbuktu. That's a short answer and like anything tax not the full answer. You received some very good full explanations, though. And, the form instructions are pretty good. Please study up on this topic so you can take on some paying clients of this sort. And, I apologize if this is short or less than polite.