Client works in Kazakhstan - How to treat income and expenses?

[Hamacher]

I have a client that is a helicopter pilot in Kazakhstan. She receives compensation, reimbursements for expenses, they contribute to a 401K and give her a per diem for overnight stays. She does pay some foreign tax to Kazakhstan but does not pay anything in for US or State taxes. She was out of the country 210 days last year. What is the best way to treat this? Would it be subject to SE tax? Would she qualify for the foreign income exclusion? Any thoughts would be appreciated.

[Burke]

Assuming she is a civilian employee and not military, she -- if a US citizen -- has to pay US tax on worldwide income. Normally, to qualify for the Foreign Income Exclusion, you must be present 330 days in the foreign country (or will be). However, see Waiver of Time requirements in Instructions for 2555 if she left due to war, civil unrest, or other adverse conditions and the IRS list of countries that qualify. Was her employer an American company?

[Hamacher]

Company

Assuming she is a civilian employee and not military, she -- if a US citizen -- has to pay US tax on worldwide income. Normally, to qualify for the Foreign Income Exclusion, you must be present 330 days in the foreign country (or will be). However, see Waiver of Time requirements in Instructions for 2555 if she left due to war, civil unrest, or other adverse conditions and the IRS list of countries that qualify. Was her employer an American company?

No she works through a Canadian company. She did not leave for any of those reasons, she is actually still working over there. She will be gone for a couple weeks and then come back for a few days. Then do it again. Doesn't sound like she will qualify for the exclusion. Second question - how do I treat the expenses? Do I need to gross up her income and show the expenses individually? She receives a $75 per diem when she is gone overnight. They also put money into a 401K for her which I am uncertain how to treat. She gets reimbursed for some of her out of pocket expenses. They also pay for her insurance (liability, life, etc.). I have a few clients overseas but this seems to be a little more involved.

BTW - Thanks for the reply.

[Bees Knees]

The 330 day requirement for the foreign earned income exclusion does not have to be all in one calendar year and it does not have to be consecutive days. Its 330 days in a 12-month period (which can be spread through two calendar years). If she worked over there for 210 days in 2012, and is still there for another 120 days in 2013, then you can take a partial foreign earned income exclusion for the income earned in 2012. It does not have to be a U.S. base employer to take the foreign earned income exclusion.

See TTB, starting on page 14-14 for details.

[Burke]

No she works through a Canadian company.

Did they issue her a T4? If not, what did they issue her for compensation? Is the 401k shown on it? Were the expenses under an accountable plan? Did they pay her in USD?

[joanmcq]

Also, the days out of country are any days in any country that is not the US. You can tax plan by making sure she stays out of country for 330 days (unless she meets the bona fide residence test next year). If she's close, have her vacation anywhere but the US. I sent a client to Mexico in 2011 for a few days to make sure she didn't blow her exclusion.

That said, this client was evacuated from her current post in January 2013 due to unrest & strife, & armed rebels taking over the city she lived in. Does anyone have a link to that list of countries that qualify for the waiver of time restriction? I googled and searched the IRS site, but I can't find the 2012 list which I'd like to bookmark so I have a chance of finding it next year.

[mactoolsix]

File for an extension

Then she will have made the 330 days and qualify for Foreign Tax Credit

Mike