What Is Internal Revenue Code Section 912?
IRC Section 912 provides a tax exclusion on specific foreign allowances for U.S. government personnel serving abroad, affecting their reportable income.
Internal Revenue Code Section 912 is a specific provision in U.S. tax law that benefits certain federal employees working abroad. It allows these individuals to exclude particular foreign and cost-of-living allowances from their taxable income. This is not a blanket exemption on all income earned, but rather a targeted exclusion for supplementary funds provided by the government to offset the unique costs of serving in a foreign post.
Who Qualifies for the Exemption
Eligibility for the tax benefits under Section 912 is not available to private-sector employees or the general public. The primary group covered consists of civilian officers or employees of the United States government. This includes a wide range of federal workers stationed in foreign countries, from diplomats to administrative staff.
A second group that qualifies for similar exemptions are individuals serving in the Peace Corps. Both volunteers and volunteer leaders fall under this provision, allowing them to exclude certain allowances from their gross income. For all eligible individuals, whether civilian employees or Peace Corps volunteers, the exemption applies only to specific allowances. Their base salary or basic compensation remains fully subject to U.S. income tax.
Exempt Allowances Covered
The allowances that can be excluded from income are detailed in three distinct parts of the code. The first part, Section 912(1), pertains to foreign area allowances. These are amounts paid to civilian government employees under federal acts, such as the Foreign Service Act or the Central Intelligence Agency Act. These funds are intended to cover costs like travel, housing, or education for dependents, which are directly associated with the employee’s official duties in a foreign country.
The second category, covered under Section 912(2), is for cost-of-living allowances, often referred to as COLAs. These payments are made to civilian officers or employees of the U.S. government stationed in areas outside the contiguous 48 states, such as Alaska and Hawaii, as well as in foreign posts. COLAs offset the higher costs of goods and services in these locations, and these allowances are granted under regulations approved by the President.
The third part of the code, Section 912(3), addresses allowances for Peace Corps volunteers and volunteer leaders. Under the Peace Corps Act, the President may determine that a portion of the living allowances paid to volunteers constitutes basic compensation, while the remainder is excludable. Excludable amounts cover living expenses, travel, and leave allowances necessary for their service.
Reporting the Exemption on Your Tax Return
For eligible employees, the process of claiming the Section 912 exemption is straightforward because it is handled automatically by their government employer. These tax-exempt allowances are already excluded from the taxable wages reported on an employee’s annual Form W-2, Wage and Tax Statement. The amount in Box 1 (“Wages, tips, other compensation”) has already had the allowances subtracted.
The employee is not required to file any additional forms to claim it. Unlike other foreign-related tax benefits that might require filing Form 2555, Foreign Earned Income, the Section 912 exemption is self-executing through the W-2. The employee simply transfers the wage amount from Box 1 of their W-2 to the corresponding line on their tax return.