If you are a U.S. citizen with income from sources outside the United States (foreign income), you must report all of that income (except for amounts that U.S. law allows you to exclude) on your tax return. This is true whether you reside inside or outside the United States and whether or not you receive a Form W-2, Wage and Tax Statement, or a Form 1099. This applies to earned income (such as wages and tips) as well as unearned income (such as interest, dividends, capital gains, pensions, rents, and royalties).

Certain taxpayers can exclude income earned in foreign countries. For 2007, this exclusion amount can be as much as $85,700. However, the foreign earned income exclusion does not apply to the wages and salaries of military and civilian employees of the U.S. Government. Employees of the U.S. Government include those who work at Armed Forces post exchanges, officers' and enlisted personnel clubs, and embassy commissaries, and similar personnel paid from nonappropriated funds. Other foreign income earned by military personnel or their spouses may be eligible for the foreign earned income exclusion. For more information on the exclusion, see Publication 54.

Residents of American Samoa may be able to exclude income from American Samoa. This possession exclusion does not apply to wages and salaries of military and civilian employees of the U.S. Government. If you need information on the possession exclusion, see Publication 570, Tax Guide for Individuals With Income From U.S. Possessions.

The pay you earn as a member of the Armed Forces may be subject to community property laws depending on your marital status, your domicile, and the nature of the payment. The community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

If you are a member of a reserve component of the Armed Forces and you travel more than 100 miles away from home in connection with your performance of services as a member of the reserves, you can deduct your travel expenses as an adjustment to income on line 24 of Form 1040, U.S. Individual Income Tax Return, rather than as a miscellaneous itemized deduction. Include all expenses from the time you leave home until the time you return home. The deduction is limited to the amount the federal government pays its employees for travel expenses. For more information about this limit, see Per Diem and Car Allowances in chapter 6 of Publication 463.

Generally, you can deduct the lesser of the contributions to your traditional individual retirement arrangement (IRA) for the year or the general limit (or spousal IRA limit, if applicable). However, if you or your spouse was covered by an employer-maintained retirement plan at any time during the year for which contributions were made, you may not be able to deduct all of the contributions. The Form W-2 you or your spouse receives from an employer has a box used to indicate whether you were covered for the year. The “Retirement plan” box should have a mark in it if you were covered.

For purposes of a deduction for contributions to a traditional IRA, Armed Forces members (including reservists on active duty for more than 90 days during the year) are considered covered by an employer-maintained retirement plan.

Individuals serving in the U.S. Armed Forces or in support of the U.S. Armed Forces in designated combat zones have additional time to make a qualified retirement contribution to an IRA. For more information on this extension of deadline provision, see Extension of Deadlines, later. For more information on IRAs, see Publication 590.

Qualified Reservist Distributions

A qualified reservist distribution is not subject to the 10% additional tax on early distributions from certain retirement plans.

Definition.   A distribution you receive is a qualified reservist distribution if the following requirements are met.

• You were ordered or called to active duty after September 11, 2001, and before December 31, 2007.

• You were ordered or called to active duty for a period of more than 179 days or for an indefinite period because you are a member of a reserve component (see Member of a reserve component, earlier under Armed Forces Reservists.)

• The distribution is from an IRA or from amounts attributable to elective deferrals under a section 401(k) or 403(b) plan or a similar arrangement.

• The distribution was made no earlier than the date of the order or call to active duty and no later than the close of the active duty period.

  

If you received a qualified reservist distribution before 2006 and paid the 10% additional tax, you can amend your return for the applicable year to claim a refund of the 10% additional tax on early distributions. Use Form 1040X to claim the refund. You have until August 16, 2007, to claim any refund or tax credit for years for which the statute of limitations (generally 3 years) has run its course.

To deduct moving expenses, you generally must meet certain time and distance tests. However, if you are a member of the Armed Forces on active duty and you move because of a permanent change of station, you do not have to meet these tests. You can deduct your unreimbursed moving expenses on Form 3903.

A combat zone is any area the President of the United States designates by Executive Order as an area in which the U.S. Armed Forces are engaging or have engaged in combat. An area usually becomes a combat zone and ceases to be a combat zone on the dates the President designates by Executive Order.

You are considered to be serving in a combat zone if you are either assigned on official temporary duty to a combat zone or you qualify for hostile fire/imminent danger pay while in a combat zone.

Service in a combat zone includes any periods you are absent from duty because of sickness, wounds, or leave. If, as a result of serving in a combat zone, a person becomes a prisoner of war or is missing in action, that person is considered to be serving in the combat zone so long as he or she keeps that status for military pay purposes.

If you are an enlisted member, warrant officer, or commissioned warrant officer and you serve in a combat zone during any part of a month, you can exclude all of your military pay for that month. It should not be included in the wages reported on your Form W-2. You also can exclude military pay earned while you are hospitalized as a result of wounds, disease, or injury incurred in the combat zone. If you are hospitalized, you cannot exclude any military pay received for any month of service that begins more than 2 years after the end of combat activities in the combat zone. Your hospitalization does not have to be in the combat zone.

If you are a commissioned officer (other than a commissioned warrant officer), you can exclude your pay according to the rules just discussed. However, the amount of your exclusion is limited to the highest rate of enlisted pay (plus imminent danger/hostile fire pay you received) for each month during any part of which you served in a combat zone or were hospitalized as a result of your service there.

You are considered a resident alien of the United States for tax purposes if you meet either the “green card test” or the “substantial presence test” for the calendar year (January 1 - December 31).

If you meet the substantial presence test for 2007, you did not meet either the green card test or the substantial presence test for 2005 or 2006, and you did not choose to be treated as a resident for part of 2005, you may be able to choose to be treated as a U.S. resident for part of 2006. See First-Year Choice in Publication 519.

These tests are explained in Publication 519. Generally, resident aliens are taxed on their worldwide income and file the same tax forms as U.S. citizens.