Discussion:Federal Employee-Working 12 months in Iraq-$85,000 exclusion IRS Form 2555
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Discussion Forum Index --> Tax Questions --> Federal Employee-Working 12 months in Iraq-$85,000 exclusion IRS Form 2555
SpicoliCPA (talk|edits) said: | 14 October 2008 |
| Greetings-
I have a client who is working for the Army Corp of Engineers in Iraq. His W-2 income has increased drastically due to his overtime and danger pay. I have always been under the impression that he will qualify for the $85,000 foreign source income exclusion due to the fact that he meets ALL the other criteria for working outside of the US to claim this on IRS Form 2555. However he has been told by other Federal Employees working in Iraq that because he is a Federal Employee he will not be able to take advantage of the $85,000 income exclusion. Does anyone have a solid answer on this? | |
SpicoliCPA (talk|edits) said: | 14 October 2008 |
| IRS PUB 54: U.S. Government Employees
For purposes of the foreign earned income exclusion, the foreign housing exclusion, and the foreign housing deduction, foreign earned income does not include any amounts paid by the United States or any of its agencies to its employees. Payments to employees of nonappropriated fund activities are not foreign earned income. I am hoping maybe someone has a client that they have assisted who works for the Army Corp (as a civilian) and was able to exclude thier foreign earned income. Anyone? | |
| 14 October 2008 | |
| are you saying that he is NOT an employee of the US government? | |
SpicoliCPA (talk|edits) said: | 14 October 2008 |
| Hey Kevin,
His W-2 is issued from DFAS, he is a employee of US Gov. Not looking good for the exclusion I think. Just wanted to see if anyone has had any traction with the 2555 exclusion for clients in similiar situations. | |
| 14 October 2008 | |
| I don't think the distinction is 'military' or 'civilian', I think the distinction is between 'work for the Govt' or 'work for anyone other than US govt'. | |
| 15 October 2008 | |
| SpicoliCPA,
If he is an employee of the federal government, forget it. He doesn't qualify. Kevin is correct about the distinction between "work for the govt" vs. "work for anyone other than US govt." Civilan personnel of the armed services are federal government employees. I have plenty of federal government employees as clients. Some have worked overseas and are civilian employees of the government and several have been attached to the military. None have ever qualified for the exclusion and never will. The only case I've seen of the exclusion was an individual employed by a US based oil company and was stationed in Bahrain. There was no connection to the US Government whatsoever. FYI, DFAS has almost become the default agency for payroll in the US Govt. My wife works for CDC and her W-2 comes from DFAS. Hope this helps. Tom | |
SpicoliCPA (talk|edits) said: | 15 October 2008 |
| Thanks Kevin and Tom,
Looks like no exclusion for Federal Employee of Army Corp, was looking for a "hail mary". Best NJB | |
SpicoliCPA (talk|edits) said: | 15 October 2008 |
| What about a "Combat Pay" exclusion? This person is a civilian working in Iraq, a designated combat zone. I know there is a combat pay exclusion for "Military" soldiers operating in a combat zone...he is a civilian working for the Army Corp in a combat zone. Thoughts?
Nick Its been said: "Throw enough sh&t against the wall and something eventually will stick" | |
| 15 October 2008 | |
| Nick,
To clarify my earlier post, look here: It's straight from the horse's mouth. As far as the civilians in a combat zone, here's the answer to your question straight from the IRS: Q-8: My brother, who is a civilian in the merchant marine, is on a ship that transports military supplies between the United States and the combat zone. Is he entitled to the combat zone military pay exclusion? A-8: No. Those serving in the merchant marine are not members of the U.S. Armed Forces. The combat zone military pay exclusion applies only to members of the U.S. Armed Forces. Neither federal civilian employees nor civilian defense contractors deployed with U.S. forces qualify for an exclusion of income earned while working in a combat zone or qualified hazardous duty area. They may, however, qualify for an extension of deadlines to file and pay taxes. (Emphasis mine). The U.S. Armed Forces include all regular and reserve components of the uniformed services that are under the control of the Secretaries of Defense, Army, Navy, and Air Force, and the Secretary of Homeland Security with respect to the Coast Guard. Here is the link for that information from the horse's mouth: Hope this helps. Tom | |
SpicoliCPA (talk|edits) said: | 15 October 2008 |
Good links to source documents Tom, I appreciate your insight (& time) and agree with your conclusions.
Just as an aside: My client today, has the opportunity to leave the Army Corp and work for a NON GOV contractor doing similiar work over there. He now must debate tax benefits of $85+k exclusion over possibly 2 years of $200+k annual vs. leaving a solid job with lifetime guarantee of work and benefits. All the best, Nick | |
| 15 October 2008 | |
| Nick,
Some perspective from someone who is married to a fed employee and who has relatives who work or worked for the fed: You just can't beat the benefits. For as much bashing as federal employees take, they have great benefits. Sure the guy gets a great exclusion for 2 years etc., but he pretty much has lifetime employment (even in Iraq), solid benefits for him and his family as you mention. If he is able to retire from the government, then the job with the contractor is no contest. If not, I would encourage him to think about stability rather than money especially at this time. Recently, I know of someone after working for himself for about 15 years jumped to the federal government. He couldn't argue with the benefits he is getting. His wife also works for the federal government. He is enjoying the stability. Just some friendly advice for your client. Tom | |
| 16 October 2008 | |
| Actually, regarding the post above concerning the rules for civilians in the merchant marine, 3 years ago I had exactly that case come up. A merchant mariner (civilian) came in who had been on a ship that had been supplying U.S. armed forces in Iraq. He had a letter from his ship's commanding officer stating that they (the civilian merchant mariners) were entitled to the same combat-zone exclusion afforded military members. I researched and quoted to him exactly the rule cited above, and told him that, as a civilian, the exclusion would not apply to him. Nevertheless, he insisted that we try. So I bundled up the return, attached a copy of the IRS rule cited above plus a copy of the ship's letter and an attachment documenting his time as a civilian on a ship in the combat zone. I told the client in no uncertain terms that the IRS rule was crystal-clear and that the IRS would not grant him the exclusion. He called me back about a month later and told me the IRS had granted the exclusion and refunded the full amount he had been expecting. I just shook my head and explained that the IRS makes a liar out of me all the time, and this was just another instance. He tried, and it worked. Don't ask me why. | |
SpicoliCPA (talk|edits) said: | 16 October 2008 |
| Tom, I get your input 100%-I just met with a health insurance agent today to attempt to mitigate the exorbitant costs my self employed family is paying for medical care.
Merchant Marines- Who pays these people? DFAS? Not same as my client who is employed by Army Corp of Engineers...? I doubt my civilian client’s commanding officer will afford a "Letter" stating his taxable wage status in a combat zone. Other precedent??? | |
| 16 October 2008 | |
| Just because the refund went through doesn't mean he won't be audited in a year or two. Returns rarely get audited before they are processed..the only thing that gets caught right out the door are mismatches with estimate or extension payments. Wait til they go looking for the missing income. | |
| 16 October 2008 | |
| My reasons for knowing some of this is from my father. My father is a now retired personnel specialist with the government. He was pretty clear that the rules only apply to military personnel not civilians. If anyone knows, he would. He was responsible for writing legislation that is still law today dealing with civilian/military issues among other things. He saw this and commented that while it could have changed, it was unlikely as Congress intended it for military personnel only and it was always clear that civilians were just that, civilians. Even the IRS gets things wrong.
Interestingly enough, I found this from the IRS in my search some time back when I was researching this issue for a client/friend: http://www.irs.gov/newsroom/article/0,,id=107467,00.html I can see where if you do what they tell you, you can get away with it. The US Merchant Marine is a fleet of US owned civilian ships, not military, which is why they are not considered part of the military. They are an auxiliary of the US Navy in a time of war. But as I said, my father, while not the original author of the legislation dealing specifically with the issue at hand, worked on revisions of it and knows it inside and out. He worked on many of these civilian/military personnel issues as I said in his 40 year government career. I have no reason to doubt him. Tom | |
| 16 October 2008 | |
| Actually, I agree with you that, per the IRS blurb, such that it is, the civilian merchant mariner would not have qualified for the exclusion. However, the client had conflicting information and "authorities" and an honest belief that his service entitled him to the exclusion. Nobody tried to "get away with anything." We laid all the cards on the table for the IRS, and I even cited for the IRS its own excerpt that you cited above. No income was missing from the return--it was all plainly disclosed on the return. If it ultimately turns against the client, he was made fully aware of the pro's and con's. But ultimately it was his money and his decision. If I had had nothing but the client's own statement to the effect that his co-workers said he could do this (like real estate agents and their haircuts and business suits), that would have been one thing. But he did have and did furnish to the IRS the letterhead correspondence from his "command" citing the "rules" and providing the dates the ship had been in the combat-zone (which I think worked out to be 2 months or so). Neither he nor I was trying to slide something by--we went to great lengths to lay both sides of the issue bare, and he was perfectly willing to accept the outcome either way. He wanted to lay the issue in the lap of the IRS and abide by the results, which is exactly what happened. His money, his decision. Simple as that. | |
| 16 October 2008 | |
| Happy,
As I said, sometimes you get away with stuff. I am not saying it's right, but when you get that much paperwork a year, one or two is bound to slip through. In your case, that probably happened. I only mentioned my dad (I've mentioned him a few times here I know) as he truly knows this area. He worked for OPM, and part of his job was to work on DOD regulations among other things. As I said, I showed him this and he really wasn't that surprised. He also said the law may change in the future (regarding the merchant marine and other military matters), but as I said, he was pretty clear about the civilian part so his attitude was don't hold your breath. Dad has a couple of major claims to fame during his government service and for someone who spent is entire government career with a small agency like OPM, he does have great stories to tell about government in action. Tom | |
