Foreign income exclusion via physical presence test?

July 28, 2015 2:46 PM

I am a U.S. citizen. I moved to a foreign country on July 1, and will officially started earning income in the foreign country on August 1. If I quit and move back to the U.S. on July 1, 2016, will I receive foreign income exclusion on my taxes for both the 2015 and 2016 tax years?

I know you are not my international tax attorney. If you have any suggestions for international tax advisers, I am so, so open to that -- and I definitely plan to get one when the time comes to do my taxes. At this point, I am trying to get an idea of what to expect so that I can plan savings/withholdings.

My understanding from reading the IRS website is that if I am out of the U.S. for 330 (out of 365) days, I can exclude foreign-earned income from my tax filing. The website notes that the 330 day period can overlap. But I can't find if it can 100% overlap. Does anybody have experience with this?

I don't feel comfortable asking my company this question, as it is small and I am concerned that it would get around that I am considering leaving after one year.

posted by anonymous to Work & Money (4 answers total)

Take a look this IRS page on the foreign income exclusion. The page also links to Form 2555, Foreign Earned Income - you can make up numbers if you don't know them and fill it out for yourself just as a test to see what it looks like.

Part Year Exclusion
If you qualify under either the bona fide residence test or the physical presence test for only part of the year, you must adjust the maximum limit based on the number of qualifying days in the year. The number of qualifying days is the number of days in the year within the period on which you both:
Have your tax home in a foreign country, and
Meet either the bona fide residence test or the physical presence test.
For this purpose, you can count as qualifying days all days within a period of 12 consecutive months once you are physically present and have your tax home in a foreign country for 330 full days. To figure your maximum exclusion, multiply the maximum excludable amount for the year by the number of your qualifying days in the year, and then divide the result by the number of days in the year.

I am reading this as saying that as long as someone is out of the US for the appropriate amount of time, s/he can claim an exclusion. But, if s/he is only paid in a foreign country for part of a tax year, the maximum exclusion for that tax year is changed.

The 2555 seems to confirm this understand - the current EZ version of the form indicates that in order to claim an exclusion for 2014, the 330 day period must start or end in 2014. Then, part IV calculates the amount of the exclusion based on the number of days worked out of the country.

So, this seems to indicate that if someone is working abroad for a full year July 1 2014 - June 30 2015, they can claim an exclusion each tax year, but the maximum exclusion each year would be 50% of the amount they could claim if they worked abroad Jan 1 - Dec 31 of one tax year.

IANYL or accountant, and I'm not 100% sure this is correct - this is just what I think the rule is saying. Please verify with someone before making financial decisions! You can trying asking the company for a referral to an independent accountant who is familiar with both local & U.S. tax laws - I can't imagine that would raise any red flags for them.
posted by insectosaurus at 4:28 PM on July 28, 2015

As I understand it, insectosaurus is correct. The maximum amount that you can exclude is prorated by the percentage of the tax year that you are outside the US.

Note that in order to qualify for the first year's exclusion, you will have had to meet the physical presence test before you file. That will require filing for an extension on your return for the first year, and paying any estimated taxes due each quarter until you have met the test and can file.
posted by brianogilvie at 5:17 PM on July 28, 2015

The document that fully describes foreign earned income is Publication 54 - that's what's extracted at the other pages linked. insectasaurus is right - you can claim the exclusion for the full period, but if it starts in July and ends in June, you'll have to pay taxes on Jan - June this year and July - Dec next year. You'll also need to file an extension next year until you meet the test I think... Though simply by dint of living overseas you get a 60 day extension to file, which almost gets you there. Oh, on re-read brianogilvie beat me to mentioning the extension.

Also of note, the exclusion does not apply to payroll taxes. That is super extra important if you are a 1099 consultant.

The normal tax filing programs (I use TaxAct now, have used TurboTax in the past) are totally capable at handling this, though maybe not the free versions.

I am not a tax professional, this is not professional advice. I just lived overseas for five years is all.
posted by solotoro at 6:33 PM on July 28, 2015

You might find some helpful info here:
http://www.globaltaxhelp.com/tax-basics
(Disclosure: This is my partner's business.)
posted by lois1950 at 9:34 PM on July 28, 2015