US FOREIGN SERVICE EMPLOYEES
Being a Foreign Service Employee presents a unique set of tax issues. While many foreign service employees spend their entire year abroad, they are not entitled to all of the tax benefits that Americans living abroad can benefit from. An example of this is the Foreign Earned Income Exclusion. While it may seem that a US foreign service employee meets all the requirements, a US Foreign Service employee cannot use the Foreign Earned Income Exclusion on Foreign Service income. This is just one example of how the ways that paying taxes as a Foreign Service employee is unique.
Extension for Taxpayers living abroad
While the due date for taxpayers living in the US is April 15th, taxpayers living outside the US are entitled to an automatic two-month extension, until June 15th. While this extension means there will be no late payments or late filing penalties for returns filed between April 15th and June 15th, the IRS will still charge interest on any amount of taxes owed and not paid by April 15th. Therefore, we usually recommend that taxpayers who may owe taxes and need an extension should pay estimated tax payments by April 15th.
Domicile vs. Residency
Domicile is your permanent home. This is the last place you lived until you legally change it. Residence, on the other hand, is the location you are currently living. While determining your residence is usually simple, determining your domicile as a foreign service employee is not always as easy. There are not clear-cut rules to determining your domicile, rather we use facts and circumstances. Facts and circumstances may include where you last lived, where you vote, where you have a driver’s license, location of your will, where you own property and other factors. This differentiation is important in determining where you need to file a state tax return.
Foreign Earned Income Exclusion
Unfortunately, salary paid by a US Government agency to employees and PSCs is not eligible for the exclusion. However, that does not mean that US Foreign Service employees cannot benefit from the Foreign Earned Income Exclusion. Foreign Service employees, or spouses of foreign service employees who meet either the bona fide residence test or physical presence test can claim the foreign earned income exclusion on income other than US Government income. This income is excluded on form 2555. This income may be either self-employment income, or the non-US Government salary of the Foreign Service spouse.
Qualifying Home Leave
The 2018 tax cuts also eliminate the deduction for qualifying home leave.
Allowances, Differentials, and Other Special Pay
In general, payments received by US Government civilian employees for working abroad, including pay differentials, are taxable. However, there are certain allowances, such as cost of living allowances, and travel allowances which are tax free. Certain foreign areas allowances are tax free, as well. Your employer should not have included the following allowances as wages on your Form W-2:
- Certain repairs to a leased home
- Education of dependents in special situations
- Motor vehicle shipment
- Separate maintenance for dependents
- Temporary quarters
- Transportation for medical treatment
- Travel, moving, and storage
Members of the Peace Corps and volunteer leaders, need to determine whether their allowances are taxable.
Taxable allowances need to be reported on your W-2 as wages.
Examples of taxable allowances include:
- Allowances paid to your spouse and minor children while training in the US
- Living allowances such as basic compensation. This may include domestic help, laundry and clothing maintenance, entertainment and recreation, transportation, and other miscellaneous expenses
- Leave allowances
- Readjustment allowances or “termination payments.”
Nontaxable allowances should not be included on your Form W-2.
Examples of non-taxable allowances include:
- Travel Allowances
- Part of living allowances for housing, utilities, food, clothing, and household supplies
If you have any questions about your US taxes as a foreign service employee feel free to email me at firstname.lastname@example.org.