Foreign Earned Income Exclusion

Dockwalk Magazine. Written by Tom Andrews of AvMar Accounting Services

One common topic in the yachting industry is the subject of how yacht crewmembers are to be taxed on their services. Having met and consulted many crewmembers in my practice I am continually amazed by the amount of American crewmembers who feel they are eligible to exclude a portion or all of their income under Section 911 of the Internal Revenue Code more commonly known as the Foreign Income Exclusion. While many crewmembers are eligible to qualify for this exclusion many more are improperly excluding income from their tax return because they do not fully understand the intricacies of this exclusion.

To qualify for the foreign earned income exclusion, a U.S. citizen working abroad must have a “tax home” in a foreign country. If your tax home – where you have your regular or principal place of business or employment – is in a foreign country, and you meet either the bona fide residence test or the physical presence test, then you qualify for the foreign earned income exclusion. What this means is that you may exclude up to $80,000 for the year (computed on a daily basis).

To qualify under the bona fide residence test, you must be a bona fide resident of a foreign country or countries for an uninterrupted period that includes a full tax year. Since most people are calendar year taxpayers, this would include a January to December period. During a period of bona fide residence, you may leave the foreign country for brief or temporary trips elsewhere for vacations or business. For example some crewmembers are permanently stationed by their employers overseas as a project manager on a new build for example. In these cases that project manager may have an apartment or house in which they live out of while employed; this is an example in which the Foreign Income Exclusion may be beneficial to the individual.

Many crewmembers are under the impression that just because they were out of the country during the tax year they are automatically qualified for this exclusion however it is important to keep in mind that the Internal Revenue Service puts equal weight on the bona fide residency test as they do the amount of time spent abroad. Living on your yacht while you are abroad and between ports of call probably will not satisfy the IRS as to your bona fide residency status. If scrutinized the IRS may examine your relationship to your new country of residence, whether you are learning the language, even whether you are paying tax to this foreign country.

You also should keep an eye on Congress. In an attempt to find tax dollars elsewhere during debate over the income tax rate cuts that took place in 2003, the Senate initially had voted to repeal the foreign earned income exclusion. Although this part of the 2003 tax bill never became law, we must continue to monitor events in Washington. Once a “revenue raiser” has been put on the table by Congressional tax negotiators, it is likely to appear again.

If you have any further questions as to your eligibility, please contact AvMar Accounting Services and AvMar Payroll Services to discuss the details of your particular

Author: Tom Andrews CPA, AvMar Accounting Services, Inc.

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