updated 2:11 PM CET, Oct 31, 2023

U.S. expands Foreign Earned Income Exclusion entitlement to key 'combat zone' support entities

The U.S. has announced it is extending the right to qualify for the Foreign Earned Income Exclusion (FEIE) to U.S. citizens and resident aliens who can demonstrate that they have supported the U.S. Armed Forces in designated combat zones, even if their “abode", or tax home, were in the United States rather than abroad.

This comes six months after a change in the Bipartisan Budget Act of 2018 made it possible for such U.S.-based taxpayers to claim the FEIE. Taxpayers who qualify under the new rules may begin to claim the FEIE beginning with the 2018 tax year, for which the ceiling on the dollar amount of foreign-earned income that taxpayers can choose to exclude from their gross income for tax purposes is US$103,900.

Prior to the passage of this law, these U.S. citizens and resident-alien employees, contractors and so on whose jobs saw them supporting the U.S. military in "designated combat zones" but who were technically resident in the United States had been unable to claim the income exclusion.  

In a statement, the Internal Revenue Service said the new law "makes it clear that contractors or employees of contractors providing support to U.S. Armed Forces in designated combat zones are eligible to claim the foreign earned income exclusion."

It added: "Taxpayers choosing the foreign earned income exclusion cannot take advantage of any other exclusion, deduction or credit related to the excluded income. This includes any expenses, losses or other items that would have been deductible had the exclusion not been claimed." 

Among the organizations welcoming the change was the American Citizens Abroad, the Washington, D.C.-based group which lobbies on behalf of expatriate Americans. 

However, it stressed that there was "no reason that this understanding of 'abode' should apply only to those U.S. citizens and resident aliens working to support the U.S. Armed Forces in designated combat zones."

It added: "There are a plethora of reasons for which a U.S. citizen who is not supporting the U.S. Armed Forces may continue to maintain an abode in the United States, while actually working overseas.

"As businesses and commerce have gone global, the ease with which individuals can 'pick-up-and-go' to take advantage of employment and financial opportunities has increased. Employees are now more mobile than ever.

"Some employees may not be able, or may not want, to relocate their home or family during their employment for a number of reasons; safety issues in the country of employment, family member health/disability issues, schooling and educational issues, special needs children, eldercare management, etc.

"These reasons and others may require that an employee keep an 'abode' or home in the United States to manage their personal and family needs while they are working overseas and paying taxes in a foreign jurisdiction. Forcing a strict adherence to the concept of “abode” puts these individuals at a disadvantage and limits their employment options.

"The abode concept is outdated and no longer fits with the way that individuals live and work in the 21st century. 

"It is time for the U.S. Congress to come into the 21st century, not only on the issue of 'abode' but also on general tax policy affecting Americans overseas."