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Overseas Contractors & the Partial Foreign Earned Income Exclusion

posted Aug 30, 2013, 2:58 PM by Krozel Capital
What prompted me to write this post is that I've had a few emails in the last week from contractors working in Afghanistan asking me to review their prior year tax returns. Both individuals had heard through conversations with co-workers that they were entitled to a partial foreign earned income exclusion for the year they moved overseas to work. They each had paid tax professionals to prepare their taxes, but the preparers they hired were not familiar with how taxation works for overseas contractors.  Well guess what? I've just completed one amendment which resulted in a 3K refund to the contractor! 

He had left the US in October 2011 to take a long term position in Afghanistan, but the person who prepared his return did not take an exclusion for the period October - December. A lot of contractors are aware of the income exclusion and also the Physical Presence Test, which is normally how an overseas contractor in Afghanistan would qualify for the exclusion. The Physical Presence Test states that one needs to be in a foreign country for 330 days out of a 365 day period. What some taxpayers (and tax preparers as well) don't realize is that the 365 day period does not have to be January 1 - December 31. You can use any 365 period. So since this individual was overseas for 330 days between Oct 2011 to Oct 2012, he qualified to take a partial exclusion on his 2011 return for the period October - December. 

So if you are a contractor in Afghanistan and did not take a partial exclusion for the year you left the US to begin working (or the year you returned to the US after your contract ended), you should file an amended tax return ASAP (the IRS has a 3 year statute of limitations from the filing due date to file an amended return for a refund).

Feel free to contact me as I am available to review your returns and prepare amendments if needed. 

Will Grant wrote a great article for Dangerous Magazine in March 2013 that all contractors should read about taxes: