Question

Which of the following represents the correct way to handle a tax return for a worker contracted by the U.S. Armed Forces with income from working in a combat zone? Since the contractor worked in a combat zone, they qualify for the military combat zone exclusion. The contractor does not qualify for the military combat exclusion, but does qualify for the foreign earned income exclusion. The contractor does not qualify for the military combat exclusion or the foreign earned income exclusion, so this income will be taxable. The contractor can deduct their combat zone earnings as a charitable deduction.

Answer 1

Which of the following represents the correct way to handle a tax return for a worker contracted by the U.S. Armed Forces with income from working in a combat zone?

Ans: The contractor does not qualify for the military combat exclusion, but does qualify for the foreign earned income exclusion.

Explanation; As per the enactment of The Bipartisan Budget Act of 2018, the eligible US. Citizen and U.S resident alien tax payers can eligible for the foreign earned income exclusion, even if their “Tax home” or “Adobe” in the U.S. from the Tax years 2018 onwards. The maximum limit for the foreign earned income exclusion is $103,900 for the Tax year 2018. Also, all the contractors and their employees who are providing support to U.S. Armed Forces in combat zones are eligible for this exclusion. When a Taxpayers claims the foreign earned income exclusion, who can’t claim any other deductions or credits which related to foreign earned income. For example; when a taxpayer does not qualify for the “military combat exclusion”, if he qualifies for the “foreign earned income exclusion”.

The “military combat exclusion” applicable only to “Armed force members in combat zone” based on their rank, but they cannot claim for the earned income exclusion.

Prior to this enactment, the eligible US. Citizen and U.S resident alien tax payers whose “Tax home” or “Adobe” in the U.S., since they cannot eligible for the earned income exclusion. Also, the contractors and their employees who are providing support to U.S. Armed Forces in combat zones were not eligible for the foreign earned income exclusion.

In the question, tax payer is the worker contracted by U.S. Armed forces for working in combat zone. Therefore, he can claim the foreign earned income exclusion, but he cannot qualify for the military combat exclusion, since he is not the Armed force members in combat zone.