It is that time again and Luke Fairfield has put out his yearly newsletter for contractors. This stuff is extremely informative and Luke specializes in all the particulars unique to our industry. For your convenience I will also put this in the Taxes For Contractors page if you need to find it quickly. Check it out. -matt
For all you ex-pats, foreign contractors and overseas residents out there I hope this letter finds you well. In an attempt to keep you current with your tax filings I am sending out this letter as a year-end reminder that 2014 is almost over. As always feel free to pass this email on to anyone in your situation who could use the help or anyone that I missed on this email. As always, I will do my best to minimize your tax bill and provide relevant advice for your situation.
Important Updates for 2014:
1) Please visit our website at www.fairfieldhughes.com. The website includes a learning center with answers to frequently asked questions. We hope you find it to be an excellent resource.
2) Our in house attorney Zac Silides can assist with the preparation, revision or updating of a trust or will and can also assist with other business related legal needs such as the creation of new business entities. Fees for these services are very reasonable based on a comparison to other options.
3) Information update related to IRS audits of the foreign income exclusion:
a. It is critically important that you retain copies of your Diplomatic passport and regular passport, overseas orders, LOAs, overseas expense receipts, VISAs and anything else that can prove you were overseas in a combat zone. Keep these for at least 5 years. Do not turn in your passports without making a scanned, color copy of them.
b. Should they choose to do so under audit, the IRS now has the ability to obtain an entry report from CBP and Homeland Security to verify your time in the US.
c. If you are claiming the exclusion under the physical presence test (330 day rule), some IRS offices are now requiring that your “abode” be outside the US to qualify. Unfortunately this term is not defined in the tax code and the IRS is using some very old court case ruling to say that it is where you maintain your social and economic ties. For those of you with family in the US, this can raise an issue.
d. In short, the foreign income exclusion has become a riskier claim as the IRS does not issue specific enough guidelines on many foreign income exclusion issues. We do not know with any degree of certainty how any audit will conclude as results vary widely by auditor.
4) FATCA. The IRS has enacted many regulations regarding foreign bank accounts and foreign financial instruments. If you have a foreign bank account with a value in excess of $10k or foreign financial holdings in excess of $50k, you may have a filing requirement to be compliant and avoid possible penalties.
5) Afghanistan Tax.
a. In 2014 Aegis was withholding a tax on income earned in Afghanistan by foreign personnel. Several other companies withhold Afghanistan tax on the employee’s behalf as well. If you are aware of foreign tax being withheld, please inform us of this fact so we can ensure you get proper credit.
b. Triple Canopy and Global withhold Iraq tax on income earned in Iraq.
c. Tax paid to a foreign country can be claimed as a credit on your US tax return (Form 1116).
d. The credit can be combined with the foreign income exclusion if you qualify but the foreign tax credit is partially reduced when both are used, making this a complex calculation.
6) Indonesian Tax. Triple Canopy employees in Indonesia present for more than 183 days have a whole new set of issues to be aware of.
a. You are currently having something called “Hypo” or hypothetical tax withheld from your paycheck. This amount will cover your US and Indonesian tax obligation in most cases.
b. TC has provided a description of how your tax obligation to each country will be calculated and handled but it is not easy reading and is complex as it varies by situation.
c. The CPA firm KPMG has been retained to prepare both your Indonesian and US returns. If you plan to use this service, I am happy to look over your returns before they are filed to make sure you received all the benefits available to you. KPMG is a huge worldwide firm who may not be overly familiar with the contract security work profession. Secondly, they will not be as responsive to each of you and your individual questions which concerns me as I have always made a point of getting each of you the answers needed immediately.
Based on the most common questions I was asked last year, let me briefly cover the points most relevant to your situation. The following is a rundown of how your tax situation differs from someone working in the states.