In order to meet the qualification test, you must reside outside of the United States on long term assignment through [Next Year Ending Date]. If your long term assignment ends or is expected end before December 31, please contact PwC immediately so your returns can be revised. In early January 2019, we will provide you with copies of the return and instructions for filing.
Please note that PwC has prepared and submitted all necessary extensions with the tax authorities on your behalf, as the returns cannot be filed until the Foreign Earned Income Exclusions test is met. This includes the special Form 2350 Extension (for individuals who cannot file their returns while until Foreign Earned Income Exclusion qualification tests are met) which extends the filing due date of the returns to January 30, 2019.
Disclosure of Revocation of Internal Revenue Code. Sec. 911, Foreign Earned income and Housing Exclusions In the current year, only claiming a credit for foreign income taxes paid produces a lower income tax liability as compared to a combination of foreign tax credits and the foreign earned income & housing exclusions. As a result, in preparing your [Current Year] income tax return and upon discussion about the impact of this change with you, we have revoked your election to claim the foreign income exclusion. Further information is provided below.
Section 911 of the Internal Revenue Code provides that qualified taxpayer may exclude from taxation certain foreign earned income. Claiming the exclusion (generally starting in the first year of a foreign assignment) results in an election to use the exclusion in all future years. In the past, claiming the exclusion, in combination with a foreign tax credit generally produced lowest tax liability for most individuals. However, changes in US tax law over the recent years and foreign income tax rates now result in a lower US tax liability for many individuals by just claiming the foreign tax credit.
Based on an optimization calculation, we have determined that revoking the election for the foreign income exclusion will produce a lower US tax liability for you in the current year. However, as discussed, you are aware that revoking the exclusion is binding for the five (5) taxable years following the current table year. As such, the foreign earned income and housing exclusions cannot be claimed on future individual federal tax returns during this five year period , unless specific permission has been granted by the Internal Revenue Service in the form of a Private letter Ruling. If permission is not granted by the IRS, and you move to a foreign tax country with an income tax that is lower than the US tax rate, revocation might increase your federal income tax liability in future years.
If you have any questions about the potential current or future impact due to revocation of the foreign earned income and housing exclusions, please do not hesitate to let us know.
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