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foreign earned income exclusion

Old 01-03-2009, 10:42 AM
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Default foreign earned income exclusion

Working on the Korean commuting contract, do you qualify for the foreign earned income exclusion?

Publication 54 (2008), Tax Guide for U.S. Citizens and Resident Aliens Abroad

You won’t have 330 days out of the US, so you don’t meet the physical presence test. But it seems that you can still qualify for the foreign earned income exclusion if you can claim to be a “bona fide resident” of Korea. Is this possible?
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Old 01-03-2009, 01:06 PM
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I don't think the requirement is that you be a tax resident of Korea. Just that you maintain a tax residence outside the US.
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Old 01-03-2009, 01:25 PM
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Originally Posted by Boomerang View Post
I don't think the requirement is that you be a tax resident of Korea. Just that you maintain a tax residence outside the US.
Well here's a quote from IRS Pub 54: (linked above)
"If your tax home is in a foreign country and you meet the bona fide residence test or the physical presence test, you can choose to exclude from your income a limited amount of your foreign earned income"

So sounds to me like if you won't meet the physical presence test, (330 days outside of the US), you'd have to meet the bona fide residence test.

In casual conversation about this job, everybody talks of the $87k income exclusion. I'm just trying to find where it's justified with the IRS.

My accountant doesn't have alot of experience with this stuff, and he told me at first glance that I wouldn't qualify for the exclusion. I'm hoping he's wrong.
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Old 01-03-2009, 04:25 PM
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With the contract for Korean, KAL puts you up at the Incheon Hyatt while you're flying their system, at their cost. So there would not be any reason (other than taxes) to buy/rent a house in Seoul.

Hopefully somebody who's already working this contract (or a similar contract), while still living in the USA will pipe in here.
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Old 01-03-2009, 04:56 PM
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Originally Posted by penguin22 View Post
while still living in the USA will pipe in here.
This will not allow you to meet the bona fide residence test. Basically you need to ask yourself, "where do I return to when I finish work"? If it is the US, you will have a tough time qualifying for it. Do you have a visa for where you are claiming you reside? If you had a house prior to accepting the overseas assignment, what are you doing with it now? If you are renting it out or did you sell it? If so, then you have a better chance of qualifying. If you are still living in it and return there when you are finished work it probably will not work.

This is just my experience from qualifying for the exemption for the last 2 years. If you do think you qualify or are not sure, pony up the money and get a tax expert that specializes in expat taxes.
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Old 01-03-2009, 05:07 PM
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Yeah that's a touchy issue right here, and I will strongly advise you to see a tax professional. One that specializes in the foreign income tax exclusion.

I moved to HKG last year and in order to qualify I have to use the physical presense test since I arrived after Jan 1st. From what I've heard you can only use the bona fide residence test from Jan 1 to Jan 1.

It's also going to help you to have an address set up, be paying bills there, have a phone number, and definitely a visa and identity card.

Don't trust my word for it, pay the money and go to a pro.
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Old 01-04-2009, 04:54 AM
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The other option is to use the Foreign Per Diem rates for each day that you are out of the USA. It doesn't quite equate to what the foreign earned income exclusion is, but it's close.

Be very careful as the IRS is actively auditing expat pilots right now and looking very carefully at the foreign earned income exclusion. They are taking a bizarre interpretation in some audits that time spent over international waters does not count towards your foreign earned income exclusion. They are asking pilots to provide them detailed ( minute by minute ) accounts of their flight times to assess the percentage of time over international waters and then reducing the exclusion by that percentage.

There are efforts underway to 1) increase the foreign earned income exclusion and 2) to assert pressure on the IRS to back off on the bizarre interpretation ( apparently a leap of logic from cases against merchant seamen ).

Below is an explanation and sample letter in regards to legislation in the House and Senate to eliminate tax on foreign earned income for Americans working abroad. In November I met with the lobbyist and board members of the American Business Council in Dubai. The lobbyist is the hired gun of MECACC, and this is one lobbyist that I like because he is driving this whole issue on behalf of the Americans working in the Middle East.

This effort is sponsored by the Middle East Council of the American Chamber of Commerce (MECACC), and the website communication feature is funded by the American Business Association – Eastern Province (ABA-EP), Kingdom of Saudi Arabia.


An Open Letter to Taxpaying Americans Working Internationally


We need your help, and you can help. U.S. Citizens abroad represent a substantial and decisive voting block. In 2000 our votes in Florida decided the outcome of the presidential election. Let’s use our influence once again correct an injustice that affects all of us who work internationally!

Americans working overseas are America’s vanguard in the global marketplace but Americans working abroad face an uphill battle. We are taxed on the basis of citizenship rather than on residence. That makes us very uncompetitive and very expensive to employ internationally. We need to pull together to reform the Foreign Earned Income Exclusion (FEIE), Section 911 of the U.S. Tax Code, and level the playing field for Americans to compete on an equal footing.

For the first time, we have bi-cameral, bipartisan legislation in the U.S. Congress: “The Working American Competitiveness Act” (S-1140) sponsored by Senator Jim DeMint (R-SC), and (H.R. 4752) sponsored by Congressman Gregory Meeks (D-NY). (See list of cosponsors below)

The FEIE was severely crippled by an eleventh-hour rider in the Tax Reconciliation and Prevention Act (TIPRA) passed in May of 2006. This legislation would not only reverse that damage, but it would increase the amount of the foreign earned income exclusion to compensate for the prolonged absence of inflation adjustments. The FEIE is at the same level it was in 1986.

We have a third supporting piece of legislation “American Tax Fairness Act of 2008” (H.R. 6614) Congressman Scott Garrett (R-NJ) which contains the same text as S1140 and HR 4752, but also includes a requirement for the U.S. Treasury to produce within 1 year a report on the United States Taxation of foreign income.

We urge you to contact Congress today and support S 1140 in the Senate and H.R. 4752 and H.R.6614 in the House. Copy and paste this link Middle East Council of American Chambers of Commerce | Global Coalition of Americans Dedicated to Restoring American Trade Competitiveness in a 21st Century Economy -- Legislative Action Center into your browser and let your voice be heard!

Americans Working Abroad = U.S. Exports = Jobs at Home

The United States is the only developed country in the world which taxes its citizens working internationally in this manner. Because of America’s unbalanced and counterproductive tax policy, Americans are either choosing not to work overseas, or they are too expensive for overseas companies to employ. As a consequence, our nation is handicapping itself in the global economic competition. This problem is serious today, and it will only become worse as globalization continues its relentless march into the future.

With a soft dollar, American exports are currently in high demand. With the weak American economy, more Americans are seeking work outside the U.S. But high exports and a strong base of taxpaying Americans working abroad are not economic conditions which are likely to endure. With the probable return of a strong U.S. dollar and economy, there likely will be fewer Americans choosing to work abroad because of a reduced financial incentive to accept the risk and inconvenience of living and working away from the comforts of home and, often, family.

Without Americans working in influential international positions such as purchasing, contract management, and project management, other nations either will fill, or are now filling, those vacancies. They will order products produced in, and services available from, their own countries. The Germans, Chinese, Russians, French, Italians and a whole host of other nationalities are aggressively replacing Americans in many key business positions and on many lucrative contracts around the globe, because U.S. tax policies have weakened American international competitiveness and have reduced the attractiveness of Americans as international employees. By pulling together, we can reverse this negative economic trend. Visit Middle East Council of American Chambers of Commerce | Global Coalition of Americans Dedicated to Restoring American Trade Competitiveness in a 21st Century Economy -- Legislative Action Center .

Over 30 years ago, Congress designed and enacted the Foreign Earned Income Exclusion (FEIE) (section 911 of the U.S. Tax Code) as a tax incentive for Americans and their families to leave the comforts and security of their homes and families to work abroad. Earlier Congresses understood the essential front-line role working Americans played in global competition, and wanted to ensure our front line stood strong. Unfortunately, over the past 20 years the FEIE has been a constant Congressional target for dilution or elimination. In May 2006 TIPRA punched a hole below the FEIE water line and reduced by over half its financial benefit to working expatriates.

As an inevitable consequence, the FEIE, intended by Congress to benefit America’s global workforce, was severely devalued as an effective economic tool to persuade Americans to work overseas, or to retain them if they were already there. American workers or their foreign employers now pay twice as much in taxes as they paid prior to January 2006 (the law was retroactive). And the law affects all ordinary income for qualifying Americans working internationally. The predictable result is fewer Americans in influential business positions, and equally educated, less expensive workers from other countries literally flooding in to fill those positions.

One of the hardest hit sectors is education. American educators, who once taught at American secondary schools or universities around the globe, suddenly faced with a doubled tax burden, have left their classrooms and returned home. This is especially troublesome in the Middle East, where American values are frequently questioned. Rather than engaging in a vigorous cultural debate, American educators have been forced by our government’s tax policies to go home.

Please join The Middle East Council of American Chambers of Commerce (MECACC), other American Chambers of Commerce (AmChams), and other associations representing overseas Americans in our fight for corrective action. For a strong economy we need a strong global economic foothold around the world.

Thank you for your support.
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Old 01-05-2009, 03:49 AM
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Shoot me an email and I'll give you the name of a lady that does some of the KAL guys taxes.


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Old 01-09-2009, 09:41 AM
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I'm getting ready to take a contract overseas. So this is a great topic. Thanks!!
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Old 05-19-2015, 12:25 AM
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Note that there have been some recent cases [Lisa Hamilton Savary, Petitioner v. Commissioner of Internal Revenue, Respondent; Rogers v. Commissioner, T.C. Memo, 2009-111; Clark v. Commissioner, T.C. Memo. 2008-71]
concerning pilots and crew trying to claim the foreign earned income exclusion under either the bona-fide residence or physical presence test when they live abroad.

One big item that seems to be consistently ignored is that flight time over international airspace is not considered a foreign workday. You must actually be flying over a foreign country or its territorial waters for such time to be considered a foreign work day for foreign earned income exclusion purposes.

In the event of audit, such oversight can be end up resulting in a huge amount of tax due plus 20% negligence penalty!
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