This is cool. Luke has cleared up a lot of myths about taxes for contractors, and he is a pro. He also specializes in preparing taxes for security contractors. Here is his newsletter for 2015 and he has a website you can go to for your own research.
Also, be sure to check out their learning center for some basic education on the various state and federal tax codes as they are applied to our industry and your particular situation. Don’t succumb to rumor and hearsay while on contract and find out later that it is all untrue. Get the facts and stay informed. –Matt
Happy New Year!
For all you ex-pats, foreign contractors and overseas residents out there I hope this letter finds you well. As always, I will do my best to minimize your tax bill and provide relevant advice for your situation. Feel free to pass this email on to anyone in your situation who could use the help or anyone I may have inadvertently missed in this distribution.
Important Updates for 2015:
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 2015 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) IRS notices.
a. These are very common and are simply the IRS computers electronically reconciling your tax return to records reported by employers, investment brokers, lenders, etc. When some item does not match, a letter is generated. These are not an audit and are usually the result of your not receiving some piece of information that should have been included in your return. If you send me these notices, I can explain what they relate to and can determine if they are correct or not.
b. Notices related to penalties. For those of you in a combat zone, there should be no penalty assessed on tax due or late filing of any tax return. Getting the IRS to accept this can be challenging. Saving records of your work location, Letters of Authorization and work contracts can be very important in getting these penalties removed.
c. Please be aware that identity theft and fraud have become major tax issues. The IRS has a variety of programs in place to fight this but it still happens alarmingly often. One program that affects many people is the early filing fraud check that the IRS performs. In short, this affects people filing very early in the tax year (mostly January and February but not limited to these times) or people with large refunds. The IRS halts the refund while it performs a check for any potential fraud. This is not an audit or cause for concern other than the unavoidable fact that it will stall your refund for up to 60 days. As tax preparers we have no control over this selection process or the subsequent timing of the refund. It is very frustrating but something that you should be aware of.
7) Indonesian Tax. Triple Canopy (Triarc) employees in Indonesia will once again have the complication of the HYPO tax issues and KPMG who has been retained to prepare the Indonesian tax return on your behalf. I will work with KPMG to complete your return. This is not always a quick process. The good news here is that it appears that the foreign tax system in place is being done away with and a much more simple system put in its place. Based on what I have heard so far, this will be a tax advantage to employees. I’ll wait to comment further until I actually see it is being done.
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.
1) Generally you will receive the first $100,800 (for 2015) of your income earned in a foreign country tax free provided that:
a. You were physically present in a country other than the U.S. for at least 330 days out of a 365 day period. This does not have to have been completely in the 2015 calendar year as a prorated partial exclusion can be obtained by extending your tax return until the 330 day period is up. You will still only file using the 2015 calendar year income but your test period for the physical presence test may run from June 2015 – June 2016 or any other dates spanning 365 days. What this does NOT mean is that you can have less than 330 days overseas out of a 365 day period and still take a prorated exclusion. This is a persistent myth and is absolutely not true.
b. You were a bona fide resident of a country other than the U.S. during 2015. Many of you have received residency Visas from Iraq this year. This is not enough proof to prove bona fide residency per the IRS. Filing under this method requires that you are a foreign resident for the full year starting Jan 1. No partial year exclusion is available. Based on the current audit situation, using this method has become more risky than in the past.
2) Filing Form 673… all that filing this form will do is exempt you from tax withholding; contrary to rumor it is NOT required to claim NOR does it qualify you to claim the foreign income exclusion. Additionally, some companies now add the cost of travel, incidentals, meals, reimbursements, etc. to the taxable income of employees filing Form 673. This causes you to be taxed on income that you never received. The best alternative to regulate tax withholdings is to file a Form W4 with your payroll department and claim a large number of allowances on line 5. Generally between 9 and 15 allowances will have enough withheld to cover your tax bill but you can also write in “exempt” or claim up to 99 allowances to drop withholding to close to zero if you do not expect to owe any tax.
CAUTION: If you choose to file this form, be aware that you may be short on federal income tax withholding if you are injured and unable to remain overseas. This could result in a very large tax bill when your return is prepared.
3) Keep a list of job related expenses – these are deductions for you. This can include travel, meals, weapons, supplies, body armor, computer, auto, telephone, postage, etc. A simple spreadsheet with yearly totals is the best way to provide this to me. Please do not send receipts; I can provide a very simple spreadsheet template for you to record your eligible expenses. See #4 below for a caution if you are an employee.
4) Expenses…many of you may have changed from working as an IC to an IE or vice versa. There is a vast difference in what can be deducted. As an IC (you receive a 1099), all expenses related to your work are deductible. As an IE (you receive a W2), only expenses required by your employer but not reimbursed are allowed as deductions and under audit the IRS will require a letter from your company detailing this. Needless to say, this is impossible to obtain from many of the companies. You can continue to deduct work related expenses as an IE but be aware that deducting too much can quickly put you on the radar.
5) You are generally eligible for an additional extension of time to file and pay your taxes. You have 180 days from the time you return to the states to file any missing tax returns without penalty if you were in a combat zone. That being said, file on time if you can; it keeps you off of the IRS radar.
6) If possible, get an address in a tax free state and use this as your U.S. address. This may save you some money on your state taxes. Tax free states are TX, FL, AK, NV, WA, SD, WY and TN. This will not work if you have a house and family in another state. CA, AL, PA, MA, NJ and HI are the worst as they do not allow the foreign income exclusion; pay attention if you live here but have the option to claim residency in another state.
7) I am getting a lot of questions about starting S-corps and LLCs from those of you working as ICs. This is a good move in most cases as properly structured it allows you a savings on what you would otherwise pay in self-employment tax and our attorney Zac can help set this up for you.
8) Lastly, what will I need from you? Every situation varies but in general I will need W-2s, 1099s, a list of work related expenses, foreign address and city you worked out of and any other tax documents you receive relating to home mortgages, property taxes, investments and other income.
For those of you being paid as an independent contractor (1099): Do not forget that the IRS will take 15% right off the top of your net income as self-employment tax. You will also pay regular income tax on the earnings. In addition, the foreign income exclusion of $100,800 does not apply to the self-employment tax calculation even though you will get the exclusion in the calculation of income tax. This can result in a very large, very surprising tax bill. Be aware of this and plan accordingly when saving for taxes.
* For 2015, we are instituting a new billing and payment policy. ALL PROCESSING OF TAX INVOICE PAYMENTS WILL BE DONE THROUGH OUR PAYPAL ACCOUNT. When your returns are completed and ready for filing, we will send you a PayPal invoice. You will be able to pay the invoice immediately using your credit card (you do not need to have a PayPal account) or eCheck (if your bank account is linked to your PayPal account), and we will receive notification as soon as your payment has been received.
Once payment is received, we will send you a copy of your returns and e-file them with the IRS and applicable states.
If you prefer to pay using ACH debit from your bank account, please let me know when you email me your tax forms.
Regardless of which payment method you choose, please note that RETURNS CANNOT BE FILED WITH THE IRS AND APPLICABLE STATES (IF ANY) UNTIL PAYMENT IS RECEIVED.
** We will continue to use a paperless system to provide you copies of your tax return. This will be in the form of a password protected PDF which will be emailed to you. The email will be sent from Melissa@fairfieldcpas.com or Records@fairfieldcpas.com. Please add these email addresses to your address book or safe senders list to make sure you receive these emails in your inbox. If you would like a paper copy, please let us know.
*** Thank you all for the countless referrals each and every year. It can be difficult to get correct tax advice and tax preparation when working overseas as there is a lot of misinformation, confusion and lack of knowledge concerning your situation. Referrals let me know I am doing a good job for you. Due to a substantial increase in clients, I have been passing some new referrals to Chris Hughes, who is a partner CPA or Zac Silides, our tax attorney, both of whom have the same knowledge concerning your situation that I have. I would love to continue working with all new referrals but it will take away from the service level I want to provide to current clients. Working with Chris or Zac will be virtually the same as working directly with me. Continue to refer anyone needing help directly to me and I will redirect them as needed based on my workload.
I look forward to hearing from each of you. Stay safe.
Luke M. Fairfield
Certified Public Accountant