VICENZA -- Tax season is almost over, and the Vicenza Tax Center has already prepared more than 750 returns since opening in late January. Tax Center personnel would like to remind the community that taxpayers are eligible for free tax assistance and useful tips by consulting the trained professionals here.
It is the center preparers' highest priority to prepare and file your income tax return accurately and in accordance with all IRS guidance and revenue rulings. One unique international taxation issue those serving in Italy encounter is the Foreign Earned Income Exclusion.
What is it?
The FEIE allows qualifying U.S. citizens or resident aliens of the United States who live overseas to exclude from income a specific amount of foreign earnings.
For 2016, the maximum exclusion is $101,300. In order to qualify for the FEIE, filers must meet three criteria.
First, you must have foreign earned income. Second, you must have a tax home in a foreign country.
Third, you must be one of the following: (a) a U.S. citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year; (b) a U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect, and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year; or (c) a U.S. citizen or a U.S. resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.
Defining 'foreign earned'
Generally, U.S. citizens are taxed on their worldwide income, wherever they live and wherever they derive income. Other countries often tax persons based solely upon their residency. This means a U.S. citizen residing overseas may be subject to both U.S. income tax and the income tax of the host nation. Fortunately, U.S. citizens who work for the U.S. government in Italy receive relief from paying Italian taxes due to the North Atlantic Treaty Organization (NATO) Status of Forces Agreement. Unfortunately, for purposes of the FEIE, the IRS is clear that foreign earned income does not include any monies paid by the U.S. government to its employees (either appropriated or nonappropriated fund employees). This means military and civilians employees do not qualify for the FEIE.
There are other taxpayers in the Vicenza Military Community, however, who are not direct employees of the U.S. government. The IRS's rules regarding FEIE are less clear as they apply to employees of U.S. Government contractors and technical representatives. The IRS has specifically stated that these employees, if covered by the NATO SOFA, are not eligible for the FEIE because they cannot be ordinarily resident in the host country and are considered to have never left the U.S. for income tax purposes. Other independent contractors performing work for the U.S. government in Italy may not be covered by the NATO SOFA, but would be subject to host-nation (Italian) taxation.
Review your contracts
Government contractors and technical representatives should review the tax--related provisions of their contracts and bring a copy of the contract to the Vicenza Tax Center for the tax preparer to review. In addition, government contractors and technical representatives can contact their employer to obtain written advice on the tax status of their contract. Because of the uncertainty in the treatment of foreign earned income, the Vicenza Tax Center is unable to prepare returns including the FEIE without confirmation that a government contractor or technical representative is not covered by the NATO SOFA.
If you have any questions about the Foreign Earned Income Exclusion or any other tax- related questions, stop by the Vicenza Tax Center in Building 166 and speak with IRS Certified tax preparers, DSN 637-8838, comm. 0444-61-8838.
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