Tax Benefits for U.S. Individuals Working in Iraq

U.S. sanctions prohibiting trade with Iraq also caused uncertainty as to claiming a Sec. 911 foreign-earned-income exclusion. These sanctions are still in force; however, the IRS has confirmed in Notice 2003-52 that U.S. civilians working in Iraq can claim the tax benefits of living abroad while supporting the U.S.s efforts there.

Foreign-Earned-Income Exclusion

Sec. 911(a) allows a qualified individual to elect to exclude from income foreign earned income (as defined in Sec. 911(b)) and housing cost amount (as defined in Sec. 911(c)). Sec. 911(d) defines a qualified individual as a U.S. citizen or resident whose tax home is a foreign country and who meets certain other requirements.

Certain Licensees

The IRS noted that an individual must be working on a contract licensed by Treasurys Office of Foreign Assets Control (OFAC) to receive the benefit of the income and housing exclusions. Such approved contracts include the large reconstruction efforts currently underway.

Pay for work on commercial contracts without an OFAC license still remains ineligible, however; employees working for companies without the license continue to be ineligible for U.S. expatriate tax benefits. Thus, companies or employees anticipating trade with a local Iraqi entity should first obtain a license or wait until the sanctions are removed.

From John E. Allis, CPA, PKF Texas, Houston, TX