The Tax Blotter – October 2019
Generally, U.S. taxpayers are taxed on income earned abroad, but may claim a foreign earned income exclusion. To qualify, the taxpayer must (1) be a U.S. citizen who is a bona fide resident of a foreign country the entire tax year or physically ...
Oct. 24, 2019
Generally, U.S. taxpayers are taxed on income earned abroad, but may claim a foreign earned income exclusion. To qualify, the taxpayer must (1) be a U.S. citizen who is a bona fide resident of a foreign country the entire tax year or physically present in a foreign country at least 330 days out of a consecutive 12-month period; (2) have foreign earned income; and (3) have a tax home outside the U.S.
Max out on the exclusion. The foreign earned income exclusion, which was established with a maximum of $82,400, is indexed annually for inflation under current law. The exclusion for 2019 is $105,900 (up from $103,900 in 2018). Note: If you satisfy the “physical presence” test over a consecutive 12-month period that spans two tax years, you may have to spread out the exclusion amount over those tax years. In this case, you must pro-rate the maximum exclusion for each tax year that it is claimed
Pay attention to details. During 2006, a couple worked on a military base in Germany and lived in a nearby townhouse. They didn’t have a German bank account. When the couple finally filed their 2006 return in 2016, they showed a Texas address and claimed a $71,929 foreign earned income exclusion. But there were several inaccuracies and omissions, including a failure to indicate the election on the front page of their 2006 return. The Tax Court upheld the IRS’ denial of the exclusion (Weschenfelder, TC Memo 2019-133, 10/3/19).
Where ‘s your abode? Usually, a taxpayer’s principal place of business—not his residence–is the “tax home for these purposes. However, your tax home isn’t in a foreign country for any period in which your “abode” is in the U.S. In a new case, a pilot worked exclusively in Saudi Arabia and spent most of his time there. But, when he wasn’t working, he lived in a house in Georgia with his family. The pilot retained his U.S. citizenship, state driver’s license and pursued more regular activities at his Georgia home. Because the Tax Court determined this was his abode, he didn’t qualify for the exclusion (Bellwood, Bellwood TC Memo 2019-135, 10/7/19).
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