As we've mentioned in our FEIE post, the Tax Home analysis is very facts specific. Whenever you hear "facts specific," it means heavily litigated. Thus, this is where CPAs and tax attorneys earn our pay. If you need a refresher on Foreign Earned Income Exclusion ("FEIE"), please click here.
Let's start off by discussing how the Tax Home arguments usually appear. This will give you an insight as to why this is so heavily controversial and what to look for. Recall if you earned income anywhere in the world, you still owe Uncle Sam taxes. Luckily, Uncle Sam gives you a break if you meet the requirements for FEIE. Great right? You earned income and you pay no taxes. Well if your life doesn't cater exactly to the guidelines (which are factually murky at times), the IRS can come back and challenge the FEIE you've claimed, which they do. Let's look at an example.
Assume you have been transferred indefinitely to London to set up a sales operation for Europe. Before you left, you distributed business cards showing your business and home addresses in London. You sold your home in Dallas but rented it to another family. You sold your car in storage. In November of last year, you moved your spouse, children, furniture, and family pets to a home your employer rented for you in London.
Shortly after moving, you bought a car, and you and your spouse got British driving licenses. Your entire family got library cards for the local public library. You and your spouse opened bank accounts with a London bank and secured consumer credit. You joined a local business league, and both you and your spouse became active in the neighborhood civic association and worked with a local charity. Your abode is in London for the time you live there, and you satisfy the tax home test in the foreign country.
The four things you should note: (1) you are in a foreign country, (2) your job is in the foreign country, (3) you assimilated to life in the foreign country, and (4) you don't know when you are coming back-it could be an indefinite assignment. If these four facts are very clear (beyond a reasonable doubt, and that's why I do only taxes), then will likely qualify for the FEIE.
What if your family remains in the US, but you have assimilated to London's lifestyle? Or maybe another one of those 4 items aren't so cut and dry (if you lived in a foreign country, but it was on a US military base)? Can you still qualify? That's where the controversy comes in and you should seek professional advice before proceeding to claim the FEIE. Remember this is only for evaluating the Tax Home. You still have to meet the other requirements to qualify for the FEIE. With that, let's delve in.
(1) Foreign country
Recall, your tax home must be in a foreign country. It is good to stress that the term "foreign country" does not include U.S. territories such as: Puerto Rico, Guam, 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, its territories, and the Antarctic region (In my opinion, if anyone is willing to live in Antarctica, they deserve tax free income). The term "foreign country" does not include ships and aircraft traveling in or above international waters, nor does it include offshore installations that are located outside the territorial waters of any individual nation.
(2) Tax home
This is where the confusion lies. When someone mentions "home," most people will likely think of where they reside with their family, where they have family dinners, and hang out with their friends. If you are this tax attorney, it is where you train your mixed border collie for her debut at the K-9 X games. Now I just need to get others on board to sponsor a K-9 X games. However, nothing is simple because we are talking about the tax code. Your "tax home" is the main place of your business, employment, or post of duty--not the plain English definition everyone who speaks English understands. If you do not have a regular or main place of business because of the nature of your work, your tax home may be the place where you regularly live. If you have neither a regular or main place of business nor a place where you regularly live, you are considered an itinerant and your tax home is wherever you work.
There's one rule we must note before proceeding. A taxpayer cannot have a "tax home" in a foreign country if the taxpayer's "abode" is in the U.S. One exception to this rule is if you are serving on behalf of the US Armed Forces in a "combat zone." Combat zone is beyond the scope of this blog since I am trying to keep it as short as possible.
The location of your abode is based on where you maintain your family, economic, and personal ties. So back to the example, you and your family assimilated to life in London. London would be considered your abode.
Your abode is not necessarily in the United States merely because you maintain a house in the United States, whether or not your spouse or dependents use the house. Your abode is also not necessarily in the United States while you are temporarily in the United States. However, these factors can contribute to you having an abode in the United States. The best way to determine where exactly your abode is located is by looking through case law.
Example from the IRS:
You are employed on an offshore oil rig in the territorial waters of a foreign country and work a 28-day on/28-day off schedule. You return to your family residence in the United States during your off periods. You are considered to have an abode in the United States and do not satisfy the tax home test in the foreign country. You cannot claim either of the exclusions or the housing deduction.
(4) Temporary or Indefinite?
The location of your tax home often depends on whether your assignment is temporary or indefinite. If temporary, you might be able to deduct your away from home expenses (for travel, meals, and lodging), but you would not qualify for the foreign earned income exclusion. On the other hand, if your new work assignment is for an indefinite period, your foreign place of employment becomes your tax home, and you meet the other requirements, your earnings may qualify for the foreign earned income exclusion. However, you would not be able to deduct any of the related expenses previously mentioned.
If you expect your employment away from home in a single location to last, and it does last, for 1 year or less, it is temporary unless facts and circumstances indicate otherwise. If you expect it to last for more than 1 year, it is indefinite. If you expect your employment to last for 1 year or less, but at some later date you expect it to last longer than 1 year, it is temporary (in the absence of facts and circumstances indicating otherwise) until your expectation changes.
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