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Foreign Earned Income Exclusion Overview
The Foreign Earned Income Exclusion allows American taxpayers who live and work in other countries to exclude all or some of their foreign wages and income from the U.S. federal income tax. It allows overseas workers to avoid taxes on a huge chunk of their foreign-earned income.
In order to qualify for the FEIE, a taxpayer must work and live outside of the U.S., as well as meet either the bona fide resident test or the physical presence test.
According to the bona fide residence test, a taxpayer may qualify for the exemption if they are a bona fide resident of a foreign country for an uninterrupted full tax year, or Jan. 1 through Dec. 31, while remaining either a U.S. citizen or a U.S. resident alien from a country that has an income tax treaty in effect with the U.S.
A taxpayer may satisfy the physical presence test if they are physically present in a foreign country for at least 330 full days in any consecutive 12-month period. The 330 days don’t need to be consecutive.
What Income is Eligible Under the FEIE?
The Foreign Earned Income Exclusion applies to earned income from services as an independent contractor or employee. This income includes salaries, wages, professional fees, and other compensatory amounts for services. Self-employment income may also qualify for the FEIE, but the exemption does not affect what the taxpayer pays in self-employment tax.
The amount of foreign income that a U.S. taxpayer may exclude each year is limited to either their actual foreign earned income, or the annual maximum dollar amount adjusted by the IRS each year. For the 2019 tax year, this maximum dollar amount will be $105,900.
FEIE Issues for Overseas Employees of Defense Contractors
Eligibility for this exclusion has had serious implications for defense contractor employees working on overseas military or Department of Defense installations, such as the Pine Gap facility in Australia. These employees may have had their tax rights violated by their employers. As a result, some of these employees may have missed out on several years’ worth of FEIE savings.
There are three main tax issues that have been reported by military contractor employees:
- Employees may have been given false tax advice by their employers or the IRS regarding the Foreign Earned Income Exclusion (FEIE). The IRS and individual employers may have told these employees that they do not qualify for the FEIE. Some employees say they were threatened with an even heavier tax bill if they tried to take the exemption.
- Employees may have been unlawfully required to sign a consent to disclose agreement. These agreements authorize the IRS to disclose the employee’s tax information to their employer. Compelling an employee to sign a consent to disclose agreement may violate their right to keep their tax information confidential.
- Agents of the IRS may have colluded with contractors in order to prevent military contractor employees from claiming the FEIE on their taxes. At least one IRS agent is accused of sharing confidential employee tax information with some defense contracting companies.
What Companies May Be Involved?
Contracting companies that may have given their employees false tax advice or pressured them into signing disclosure agreements include:
- AECOM
- Boeing
- E&M Technologies
- General Dynamics
- HP
- IBM
- Leidos
- Northrop Grumman
- Raytheon
- SAIC
- Stellar Solutions
If you are employed by a military contractor and you believe you may have been given false tax advice or had your taxpayer rights violated, you may qualify to join an FEIE investigation and work with a tax attorney to pursue compensation.
