Key Takeaways
- The **2024 Foreign Earned Income Exclusion** is **$126,500** per person (Form 2555)
- Clergy have **dual tax status**: employee for income tax, self-employed for SE tax
- Military **BAH, BAS, and uniform allowances** are always **tax-free** (not part of combat zone exclusion)
- FBAR filing required when foreign accounts exceed **$10,000 aggregate** at any time during the year
- You **cannot claim both** the Foreign Tax Credit and FEIE on the **same income**
Special Categories (Clergy, Military, Foreign)
Certain taxpayers face unique tax rules based on their profession or location. The EA exam frequently tests these special provisions for clergy, military personnel, and U.S. citizens working abroad.
Clergy Income & Self-Employment Tax
Ministers, priests, rabbis, and other religious leaders have a unique dual tax status: they are treated as employees for income tax purposes but as self-employed for self-employment (SE) tax purposes.
Housing/Parsonage Allowance (IRC Section 107)
IRC Section 107 provides a powerful tax benefit allowing ministers to exclude housing costs from gross income. This exclusion applies in two situations:
| Housing Type | Treatment |
|---|---|
| Church-provided parsonage | Fair rental value excluded from income tax |
| Cash housing allowance | Amount excluded up to limits below |
The housing allowance exclusion equals the lesser of:
- Amount officially designated in advance by the church
- Amount actually used to provide a home
- Fair rental value of the home (including furnishings, utilities, garage)
Important: The housing allowance is excluded from income tax but included in SE tax calculations. A minister with $35,000 salary plus $10,000 housing allowance pays income tax on $35,000 but SE tax on $45,000.
Form 4361: Exemption from SE Tax
Ministers may apply for exemption from self-employment tax using Form 4361 if they meet all requirements:
- Must be conscientiously opposed to public insurance based on religious principles (not general conscience)
- Cannot request exemption for economic reasons
- Must file by return due date (including extensions) for the second tax year with at least $400 net SE earnings from ministerial services
Once approved, the exemption is irrevocable and applies only to ministerial earnings (not other self-employment income).
Military Pay & Benefits
Active-duty military members receive several tax-advantaged forms of compensation.
Tax-Free Military Allowances
These allowances are always tax-free regardless of combat zone status:
| Allowance | Description |
|---|---|
| Basic Allowance for Housing (BAH) | Housing cost offset |
| Basic Allowance for Subsistence (BAS) | Food cost offset |
| Uniform Allowance | Uniform maintenance costs |
Combat Zone Tax Exclusion (CZTE)
Military pay earned in a designated combat zone receives special treatment:
| Service Member | Exclusion Limit |
|---|---|
| Enlisted members & Warrant Officers | Unlimited - all military pay excluded |
| Commissioned Officers | Limited to highest enlisted pay + imminent danger pay |
Key rule: If you serve even one day in a combat zone during a month, your entire month's pay qualifies for exclusion.
2024 Designated Combat Zones include:
- Arabian Peninsula (Iraq, Kuwait, Saudi Arabia, Qatar, Bahrain, Oman, UAE)
- Afghanistan area (including direct support in Jordan, Pakistan, Tajikistan)
- Kosovo area
- Sinai Peninsula (qualified hazardous duty area since 2015)
Combat zone service also provides automatic extensions of at least 180 days after leaving the zone to file returns and pay taxes.
Military Moving Expense Deduction
Under TCJA (2018-2025), only active-duty military can deduct moving expenses. Requirements:
- Move must be due to Permanent Change of Station (PCS) orders
- Claimed on Form 3903 as an above-the-line deduction
- 2024 mileage rate: $0.21 per mile for moving
- Meals are NOT deductible
Armed Forces Reservist Travel Deduction
Reservists who travel more than 100 miles from home to perform reserve duties may deduct:
- Unreimbursed travel, meals, and lodging expenses
- Claimed on Form 2106 as an above-the-line adjustment
- Deductible only to extent expenses exceed BAH and BAS received
Foreign Earned Income Exclusion (FEIE)
U.S. citizens and resident aliens working abroad may exclude foreign earned income from U.S. taxation using Form 2555.
2024 FEIE Limits
| Category | Amount |
|---|---|
| Maximum exclusion (single) | $126,500 |
| Maximum exclusion (MFJ, both qualify) | $253,000 |
| Base housing amount | $20,240 (16% of FEIE) |
| Maximum housing exclusion | $37,950 (30% of FEIE) |
Qualifying Tests
You must meet one of these tests:
| Test | Requirement |
|---|---|
| Bona Fide Residence Test | Establish residence in a foreign country for an uninterrupted period including an entire tax year |
| Physical Presence Test | Present in a foreign country for at least 330 full days during any 12-month period |
Additional requirements:
- Tax home must be in a foreign country
- Cannot be a U.S. government employee
- Income must be earned income (wages, self-employment), not passive income
Foreign Housing Exclusion/Deduction
In addition to FEIE, you may claim a housing exclusion (employees) or deduction (self-employed) for foreign housing costs exceeding the base amount. The limit varies by location - high-cost cities like Hong Kong allow up to $114,300 in 2024.
Foreign Tax Credit vs. FEIE
Critical rule: You cannot claim both the Foreign Tax Credit (Form 1116) and FEIE on the same income.
| Situation | Best Choice |
|---|---|
| Low foreign tax rate | FEIE often better |
| High foreign tax rate | Foreign Tax Credit often better |
| Income exceeds $126,500 | May use both - FEIE on first $126,500, FTC on excess |
5-Year Rule: If you revoke the FEIE election, you cannot claim it again for 5 years without IRS approval.
U.S. Citizens Abroad: Reporting Requirements
U.S. citizens owe tax on worldwide income regardless of where they live. Additional reporting requirements apply:
FBAR (FinCEN Form 114)
| Threshold | Requirement |
|---|---|
| $10,000 aggregate in foreign accounts at any time | Must file FBAR |
| Due date | April 15 (automatic extension to October 15) |
| Filing method | Electronically through BSA E-Filing System |
Penalties: Up to $16,536 per violation (non-willful); greater of $165,353 or 50% of account balance (willful).
Form 8938 (FATCA)
| Filing Status | Living in U.S. | Living Abroad |
|---|---|---|
| Single | >$50,000 (year-end) or >$75,000 (any time) | >$200,000 (year-end) or >$300,000 (any time) |
| MFJ | >$100,000 (year-end) or >$150,000 (any time) | >$400,000 (year-end) or >$600,000 (any time) |
Key difference: FBAR is filed separately with FinCEN; Form 8938 is filed with your tax return.
Pastor Williams receives a $50,000 salary and a designated $15,000 housing allowance from his church. The fair rental value of equivalent housing is $12,000. For income tax purposes, what is Pastor Williams' gross income?
Sergeant Martinez, an enlisted Army member, served in Kuwait for the entire month of March 2024. Her monthly basic pay is $4,500, and she received $2,000 BAH and $450 BAS. How much of her March compensation is excluded from federal income tax?
Emily, a U.S. citizen, worked in Germany for all of 2024 and earned $180,000. She paid $45,000 in German income taxes. What is the BEST tax strategy for Emily?