Dept of Defense employee in Combat Zone...

[AZ-Tax]

My client in 2008 was either part year or full year in the "designated combat zone" while employed with the U.S. Dept of Defense in the middle east. In 2007 he filed his tax return with the foreign income exclusion. In TTB 14-8 it mentions nothing about DOD employees and my clients W-2 has an amt in box 1 nothing in box 12. Based on the TTB, sounds like my client will need to obtain a corrected 2008 w-2 to reflect no amt in box 1 and an amt in box 12 code Q. Any thoughts or comments?

[AZ-Tax]

My client emailed the IRS (special dept) and here is the reply...

Dear (my clients name):

Thank you for your e-mail of 04/03/2009.
This answer is based on our understanding of the facts you presented in your question. Omission of facts may affect the answer given.
Per Publication 3, Armed Forces' Tax Guide, the deadline for filing tax returns, pay taxes, filing claim for refund and taking other action with the IRS is extended if you serve in the Armed Forces in a combat zone/hazardous duty area.
The deadline for taking action with the IRS is extended for 180 days after the later of:
The last day you are in a combat zone/hazardous duty area or have qualifying service outside of the combat zone/qualified hazardous duty area.
The deadline extension provision also applies if you are serving in a combat zone or a qualified hazardous duty area in support of the Armed Forces. This includes Red Cross personnel, accredited correspondents and civilian personnel acting under the direction of the Armed Forces in support of those forces.
Also spouses of individuals who serve in a combat zone are entitled to the same deadline extension.

Please be advised, as far as qualifying for the tax exemption you must be in the Armed Forces.

You should check our Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad, Chapter 4, page 11, Foreign Earned Income and Housing Exclusion - Deduction.
If you meet certain requirements, you may qualify for the foreign earned income and foreign housing exclusion and foreign housing deduction.
If you are a U.S. Citizen or resident alien of the United States and you live abroad, you are taxed on your world wide income. However, you may qualify to exclude from income up to $85,700.00 of your foreign earnings. In addition you can exclude or deduct certain foreign housing amount.
Also refer to Publication 54, Physical Present Test on page 14. In general, to meet the physical presence test, you must be physically present in a foreign country for at least 330 full days during a 12 month period.
You should also check Publication 516, Government Civilian Employee's Stationed Abroad.
Please be advised that I have updated your 2008 account to show the Combat Zone Extension you have requested.
IRS publications and forms my be accessed through our website at the following address: http://www.irs.gov/forms <http://www.irs.gov/forms> pubs/index html or ordered through our toll free forms line at
800-829-3676 which is available 24 hours a day, 7 days a week, with a 7
- 10 day delivery time frame.
Sincerely,
Ms. Kathie Eldred
Employee ID 0172932

Sounds to me my client, an employee of the Dept of Defense, may qualify for the "deadline extension" which I understand allows the qualifying taxpayer 180 days after leaving the combat zone to file their tax return but the line I separated out reads as if my client being the DOD employee does NOT qualify for 100% exemption but may qualify for the foreign income exclusion.

Your thoughts and/or comments please.

[travis bickle]

It seems that

if your client is a DoD employee in a combat zone in support of our Armed Forces stationed there, the individual can take the filing extension [that is the way I read that email from the IRS].

However, notice the following from page 16 of Pub 54:

Foreign earned income does not include the following amounts:
. . . .
Pay you receive as an employee of the U.S. Government.(See U.S. Government Employees, later.)

and

the section U.S. Government Employees on page 18 spells it out in even greater detail, no foreign income exclusion, no housing exclusion, etc, etc and it specifically says for employees of both appropriated-fund agencies and non-appropriated-fund agencies.

Based on that, I do not see how your client can exclude anything.

[AZ-Tax]

Travis, my clients W-2 was issued by.....

a company based in the U.S. but not the U.S. Govt. Upon talking to the company, they are not a U.S. Govt employer but are contracted to hire people to work for U.S. Govt.

Don't know if that matters.

[travis bickle]

It certainly does matter

a company based in the U.S. but not the U.S. Govt. Upon talking to the company, they are not a U.S. Govt employer but are contracted to hire people to work for U.S. Govt.

Don't know if that matters.

Your OP said he was in a combat zone "while employed with the U.S. Dept of Defense" -- that means no foreign income exclusion.

As a contractor/contractor employee, it is quite a different matter. He should be able to exclude all relevant income, provided he meets the other criteria.