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Overseas Contractors & the Partial Foreign Earned Income Exclusion

December 12, 2015

What prompted me to write this post is that I’ve received a few emails recently from contractors working overseas asking me to review their prior year tax returns. These individuals heard through conversations with co-workers that they were entitled to a partial foreign earned income exclusion for the year they moved overseas to work. They had each paid tax professionals to prepare their taxes, but the preparers they hired were not familiar with how taxation works for overseas contractors.  Well, guess what? I just completed one amendment which resulted in a $3,000 refund to the contractor!

He left the US in October 2014 to take a long term position overseas, but the person who prepared his return did not take an exclusion for the period October – December. A lot of contractors are aware of the income exclusion and also the Physical Presence Test, which is normally how an overseas contractor would qualify for the exclusion. The Physical Presence Test states that one needs to be in a foreign country for 330 days out of a 365 day period. What some taxpayers (and tax preparers as well) don’t realize is that the 365 day period does not have to be January 1 – December 31. You can use any 365 day period. So since this individual was overseas for 330 days between Oct 2014 to Oct 2015, he qualified to take a partial exclusion on his 2014 return for the period October – December.

So if you are a contractor working overseas and did not take a partial exclusion for the year that you left the US to begin working (or the year you returned to the US after your contract ended), you should file an amended tax return ASAP (the IRS allows for a 3 year statute of limitations from the filing due date to file an amended return for a refund).

Feel free to contact me as I am available to review your returns and prepare amendments if needed.