Foreign Income Exclusion
 

hey all,

I am considering a 6 month offshore tax free contract.

I was wondering if the Foreign Income Exclusion of 92k would apply in this situation?

Any ideas?

Regards

For it to apply, you have to reside outside the US for more than I believe 330 days of the year. If you are only gone six months I'm not sure if you can still qualify for the exemption. Consult a tax attorney

H&R Block does expat tax. They even represent you if you have to deal with the IRS. A friend of mine had this happen last year and he said they were excellent.

There are two ways to qualify for the exemption. Being outside the US for 330 days (you can prorate the 92k if you are in the US too many days). The other is to be a "bona-fide" resident for the whole year, which you probably won't be.

Here is another painful rule that myself and 3 colleagues found out about the hard way: Income earned on or over international waters is considered US earned income, not foreign income. We had never heard of this before but the IRS sent us highlighted (by hand) instructions that stated this.

Luckily our flight time was almost always over land.

A six month contract will not count. The two ways to earn the foreign income exclusion are a.) 330 days outside of the US as mentioned above or b.) Proof that your primary residence is outside of the US for the entire year. Sorry for the bad news

You might be able to use the foreign per diem tables to get a daily deduction for every day overseas. That can add up to a nice deduction in itself.


It's not really a rule, it is a bazaar interpretation by the IRS. They have done that to a number of our guys as well. One can argue that it is the percentage of total work time over international waters. Since the actual flying portion of our total work time is actually rather small it makes the percentage of time over international waters that much less. That has been successfully done on two of these audits that I know of.



TP

The first two of my buds that it happened to had to fight it with the IRS, and won. They had little to no overwater time, but the IRS sent them a nastygram stating they had to prove it.

I was dash 3 in the fight. I xeroxed my logbooks, highlighted the flights that had any overwater time, and calculated how much was overwater. For me it was about 7 pct of my flight time. They accepted this and I didn't have to have a meeting with them. What a relief.

Knowing this now, it will definitely affect my choice of my next contract job.

BTW I disagree with this IRS rule if you are flying a foreign flagged aircraft (or ship). If you are flying a US flagged aircraft, I would agree. But a foreign flagged aircraft?

I think the IRS is smoking crack. I am looking into the rule further.

I know several guys that had this situation with the IRS, they all fought it and they eventually all were able to get their exclusion honored by the IRS. It is regrettable that there isn't a unified effort to bring this to court (due to cost evidently) because I would love to see the IRS trying to explain to a federal judge that while I am on a Japanese registered A/C operated by a Japanese national carrier flying over the South China Sea, I'm actually in the US.....!

The funny thing about their creative interpretation of things is that if I am on transit in the United States but I spend less than 24 hours in the US before I continue to another country abroad, then the IRS considers that as if you never entered the country...!
I know you said "smoking crack" as a joke, but those two interpretation of where you physically are at one point or another, had to come from somebody under the influence......!

The history of this interpretation by the IRS goes back to merchant seamen ( yes, I just said seamen ). Merchant seamen were trying to claim the foreign earned income exclusion, but the rule is quite clear in that one must be IN a foreign country or resident of a foreign country. The IRS argued that a merchant seaman is not in a foreign country during the course of their work since they are on the high seas in international waters most of the time and their foreign income was disallowed. So some bright spark in the IRS thinks that the same applies to pilots ( who apparently only work when they are in the airplane flying over international water :rolleyes: ).

Nevermind the spirit of the foreign earned income exclusion. That being that one who is not in the USA for more than 330 days or one who is residing overseas is not using tax payer funded services. I.E. police services, fire services, roads, schools, etc, etc, etc.

There is no doubt in my mind that someone who fought it all the way to the top would win, just based on common sense. The cost to do so for an individual is prohibitive though. It would take a class action suit to spread the costs. Maybe we can ask ALPA to help us out ;)



Typhoonpilot

The first few posts didn't quite get it, so I'll chime in. The super short answer... It Depends.

The short answer is ... If you get a stamp in your passport saying that you are a resident of the foreign country in question, then at the end of the day you are going to qualify. If you are not a resident of a foreign country, then you need to pass the 330 day test.

I was a tax professional years back. I have also worked as an expat pilot while on furlough, so I've actually done it.

Best of luck with your decision. I know it is a tough one!

Fly Safe!