If you were based at a foreign domicile there are two different ways to file. The first is by taking a credit for any taxes that you have paid to a foreign country against the tax due the U.S. This method must be used if you were domiciled out of the U.S. for less than one calendar year. You will need to provide documentation on the total income earned abroad and the amount of foreign tax paid.
The second way is to claim the Foreign Earned Income Exclusion; the dollar amount of this exclusion for 2024 is $_________. To take advantage of this exclusion, you must meet one of two tests—the Bona Fide Residence Test or the Physical Presence Test. To meet either test, you must live in or be present in a foreign country. A foreign country usually is any territory (including the air space and territorial waters) under the sovereignty of a government other than that of the United States.
Your income is inclusive of any amounts paid to you by or on behalf of your foreign employer. These would include any of the following sources:
Income Sources:
Expenses, if qualified:
We must have a copy of your Year End Audit Report providing the number of trips and each destination.
To meet the Physical Presence Test, you must be physically present in a foreign country for 330 full days during a period of 12 consecutive months. What does this mean? The IRS considers a travel day as a day in the US—which means you have 34 days to be traveling to, from, and in the US. The IRS defines a full day as a 24 hr period beginning at midnight. Time you spend flying over foreign water or a foreign country is not considered physically present in a foreign country, thus, these travel days count against you.
The term “foreign country” does not include U.S. possessions such as Puerto Rico, Guam, and the Commonwealth of the Northern Mariana Islands, the U.S. Virgin Islands, or American Samoa. For purposes of the foreign earned income exclusion, the foreign housing exclusion, and the foreign housing deduction, the terms “foreign,” “abroad,” and “overseas” refer to areas outside the United States, American Samoa, Guam, the Commonwealth of the Northern Mariana Islands, Puerto Rico, the U.S. Virgin Islands, and the Antarctic region. The term “foreign country” does not include ships and aircraft traveling in or above international waters, nor does it include offshore installations which are located outside the territorial waters of any individual nation.
You can count days you spent abroad for any reason. You do not have to be in a foreign country only for employment purposes. You can be on vacation time. You do not meet the physical presence test if illness, family problems, a vacation, or your employer’s orders cause you to be present for less than the required amount of time.
However, the minimum time requirement can be waived if you must leave a foreign country because of war, civil unrest, or similar adverse conditions in that country. You must be able to show that you reasonably could have expected to meet the minimum time requirements if not for the adverse conditions, and that you had a tax home in the foreign country and were a bona fide resident of, or physically present in, the foreign country on or before the beginning date of the waiver.
This qualification is the most difficult to meet, but offers the greatest flexibility and simplicity in taking the foreign income exclusion.
Make sure you track your travel to the day. Should an Audit arise, the burden of proof will be on you to show documentation that you were physically present in a foreign country for 330 full days. Please note that, unlike Bona Fide Residence, meeting the federal Physical Presence requirements will not necessarily exempt you from paying state income tax.
To meet the bona fide residence test, you must have established such a residence in a foreign country. The bona fide residence test applies to U.S. citizens and to any U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect.
The term “foreign country” does not include U.S. possessions such as Puerto Rico, Guam, and the Commonwealth of the Northern Mariana Islands, the U.S. Virgin Islands, or American Samoa. For purposes of the foreign earned income exclusion, the foreign housing exclusion, and the foreign housing deduction, the terms “foreign,” “abroad,” and “overseas” refer to areas outside the United States, American Samoa, Guam, the Commonwealth of the Northern Mariana Islands, Puerto Rico, the U.S. Virgin Islands, and the Antarctic region. The term “foreign country” does not include ships and aircraft traveling in or above international waters, nor does it include offshore installations which are located outside the territorial waters of any individual nation.
To qualify as a bona fide resident – you must establish residency in the foreign country. The IRS refers to Tax Home when discussing this deduction. They state in tax code that: You are not considered to have a tax home in a foreign country for any period in which your abode is in the United States. “Abode” has been variously defined as one’s home, habitation, residence, domicile, or place of dwelling. It does not mean your principal place of business. “Abode” has a domestic rather than a vocational meaning and does not mean the same as “tax home.” The location of your abode often will depend on where you maintain your economic, family, and personal ties. (Title 26, sub-title A, Chapter 1, Sub-Chapter N, Part 3, Section 911, Paragraph 3,)
Example: You accept a contract with a foreign carrier based in Dubai. You are provided with an apartment to live in on your days off. Your wife and children remain in the United States. On days off of any duration, you return home to the U.S. All of your personal items, heirlooms, photographs, golf clubs, boat etc. are located in the U.S. as are your bank, investment and retirement accounts. In this example, you do not qualify for foreign income exclusion. We are not able to prove that we have established a residency which qualifies as an “abode”.
The intent of this law is to provide tax relief to those people living abroad who do not reside or earn their income in the U.S. It is argued that they are not taking advantage of public services in the U.S. and should not be required to pay income tax to support these services and benefits. When we look at this “intent” it is obvious that the above example does not qualify for the earned income exclusion.
The other determining factor for this test is duration. You must be a bona fide resident of a foreign country for one entire tax year, January 1 to December 31 of any year. For example, if you were based abroad in July of 2021, your qualifying period doesn’t even start until January 1 of 2022 and will not be completed until January 1 of 2023. There is a special extension that we file in this situation with the IRS to grant an extension of time until the qualifying period can be met. If any tax is to be due on the return, it must be paid in a timely manner – April 15 of the following year. We would calculate your return under the assumption that you will be meeting the requirement. Once you have met this requirement, your return is then simply sent to the IRS for filing. If you should not meet the duration requirement, your return would be recalculated without the foreign income exclusion. If you have any questions on this process—please call, we will be happy to discuss it with you.
2023 Exclusion amount and limits:
Foreign Earned Income Exclusion requirements:
Tax Home vs. Abode:
Bona Fide Resident vs. Physical Presence:
Part year Exclusions:
Definition of Foreign Earned Income for flight crew members:
Employee vs. Self-Employed
Effects of choosing the Foreign Earned Income:
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