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Old 1 November 2018, 11:33
LukeFairfieldCPA LukeFairfieldCPA is offline
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International Tax Update - FS Tax Group

Posting this so everyone has it early this year. Best wishes!

We are sending this update early this year as there have been significant changes to the tax laws and we have received many questions related to these changes.

For all of you ex-pats, foreign contractors and overseas residents out there we hope this letter finds you well. The Firm is preparing for another busy tax season. As always, we will do our 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 we may have inadvertently missed in this distribution.

Please be aware that identity theft and fraud have continued to be 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.
Important Updates for 2018:
1) Trump Tax Reform. A series of major changes related to the new tax laws are here.
a. A series of news articles recently have informed us that employers may have applied incorrect tax withholding tables to your income and as a result, many taxpayers may have less than the required amount of withholding resulting in unexpected balances due. We cannot comment on this until we see W-2s but it is important that you be aware of the possibility of under withholding.
b. The standard deduction will double to $12,000 for single filers and $24,000 for married joint filers, personal exemptions will be eliminated, and the child tax credit will increase to $2,000 per child.
c. Deductions for employee work expenses, moving expenses, tax preparation fees and other non-reimbursed employee expenses will be eliminated. This will impact you if you are used to deducting the cost of gear, weapons and overseas expenses. There will no longer be a way to deduct these. Anyone that is 1099 or has a business will still be allowed to deduct all related expenses.
d. State tax and property tax deductions will be capped at $10,000. This is a particular issue for taxpayers in high tax states. Some states have attempted workarounds to bypass this issue but the IRS has been firm that they will not allow loopholes on this.
e. Limits on the deductibility of mortgage interest on loans over $750k. Home equity loan interest will still be deductible as long as it is related to improvements on the home.
f. There will be a new deduction for income from S Corporations, LLCs and sole proprietors. In general, taxpayers were given a gift here. The new “passthrough” deduction allows you to exclude 20% of net income from tax, which is a significant savings.
g. Overall tax rates have dropped a couple percentage points for most tax brackets.
h. We are trying very hard to be as efficient as possible. As such, we are asking to receive work prior to 4/5/2019 to guarantee that we can get it done by the 4/15 deadline. Work received after this will be extended until after the deadline.
2) Foreign Tax and the Foreign Income Exclusion
a. We have received numerous questions on a change the IRS made to the foreign income exclusion rules. The IRS now states that taxpayers working in a Combat Zone no longer need to prove that they do not have an abode in the US (always an issue in the past). This is an excellent and favorable clarification. THIS DOES NOT AUTOMATICALLY QUALIFY YOU FOR THE FOREIGN INCOME EXCLUSION. You still need to be overseas 330 days out of 365 to claim this OR be a bona fide foreign resident. The change in no way qualifies you for bona fide residency as this option requires that you have an “abode” in a foreign country, not just that you prove you do not have one in the US. Some recent case law (Linde v Commissioner) may help with claiming bona fide residency in Iraq but it is not a guarantee of a win in an audit. We are seeing a lot of other tax websites and preparers making very general statements that everyone now qualifies. Do not believe them!
b. There have also been several questions on qualifying for the 330 (FEIE) if time overseas was unexpectedly cut short (base closure, injury, etc.). The overwhelming answer from the IRS is not to approve these as they contend that it was a choice to go work overseas and the rule applies to someone living in an area and war breaks out, forcing them to leave. We do not recommend filing for this as every case of it will be looked at closer.
c. In 2018 Garda/Aegis, IDS and others were 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.
d. Triple Canopy, Janus, SOC and Global withhold Iraq tax on income earned in Iraq on many contracts.
e. Indonesian Tax. JDA employees are paying foreign tax.
f. Tax paid to a foreign country can be claimed as a credit on your US tax return (Form 1116).
g. 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.
h. SOC is paying Iraq tax on your behalf and beginning with 2018 SOC will be reporting this fact on your W-2 and withholding this tax from your wages.
i. Garda/Aegis announced that it would no longer pay the Afghan tax on behalf of employees in 2018. The company has been withholding 20% from your paycheck to cover this tax which equates to a pay cut of 20%. A 20% quarterly bonus has been paid to make up for this. Many of you changed your W4 withholding so your paycheck would not decrease. Just be aware that by not having as much federal withholding the large refunds obtained in past years will not reoccur if no federal income tax is withheld. We expect this to create many questions as results will be so different from past years IF withholding levels were changed.
3) 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 greater than $10k or foreign financial holdings greater than $50k, you may have a filing requirement to be compliant and avoid possible penalties.
4) 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 an 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 us these notices, we 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.
5) Information update related to IRS audits of the foreign income exclusion:
a. Interestingly, the IRS suffered a major defeat in their aggressive audit program on the foreign income exclusion. The case of Linde Vs. IRS Commissioner is a good read and will be a major obstacle to the IRS pursuing foreign income exclusion claims under both the physical presence test and the bona fide residency test.
b. As noted above, this case and others like it may have prompted the IRS to add a combat zone exception to the requirement that a taxpayer not have an abode in the US when claiming the 330 (FEIE).
c. 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.
d. Should they choose to do so under audit, the IRS can obtain an entry report from CBP and Homeland Security to verify your time in the US.
6) 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 compared to other options.
7) Bitcoin and Cryptocurrency. We are receiving many questions about reporting and taxation related to bitcoin. This is an emerging tax area that is seeing increasing interest from the IRS. Please let us know if you have questions or concerns in this area.
Based on the most frequent questions we are asked, here are the most relevant points related 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 $104,100 (for 2018) 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 2018 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 2018 calendar year income but your period for the physical presence test may run from June 2018 – June 2019 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 not true.
b. You were a bona fide resident of a country other than the U.S. during 2018. Many of you have received residency Visas from Iraq in recent years. 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. While it is possible to claim this, it is more difficult to prove under audit.
2) 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. Even so, file on time if you can; it keeps you off the IRS radar.
3) 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.
4) As mentioned earlier, to the disappointment of many, employees are no longer able to deduct the cost of work related expenses.
5) 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), no deduction of expenses will be allowed.
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) We are 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. With the new 20% deduction on passthrough income, this option is especially beneficial going forward.
8) Lastly, what will the Firm need from you? Every situation varies but in general we 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.

Independent contractors (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 $104,100 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.

** As always, we thank you all for the many referrals every year; referrals let us all know we are doing a good job for you.

We look forward to hearing from each of you. Stay safe.

FS Tax Group, Inc.
Zac Silides – Tax Attorney
Luke M. Fairfield – Managing Partner
Melissa Leitch – Tax Manager
Greg Whitcraft – Tax Staff
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  #2  
Old 5 November 2018, 12:37
LukeFairfieldCPA LukeFairfieldCPA is offline
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We have also just heard that Garda World in Afghanistan is now only giving 10% quarterly bonuses instead of the previous 20%. Just FYI to new Garda people,
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  #3  
Old 5 November 2018, 13:06
pm410 pm410 is offline
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Quote:
Originally Posted by LukeFairfieldCPA View Post
We have also just heard that Garda World in Afghanistan is now only giving 10% quarterly bonuses instead of the previous 20%. Just FYI to new Garda people,
Yeah that was changed early this year.
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  #4  
Old 8 November 2018, 21:56
justamedic justamedic is offline
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Join Date: Sep 2014
Location: LV
Posts: 1,234
Great info. Thanks.
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