The 330-Day Itch

OPINION 330

By Orlando Gotay, Tax Attorney

I hear it all the time, and it goes something like this: “If you spend 330 days of the year outside the United States, then you have a tax exemption.” Of course, this refers to the federal Foreign Earned Income Exclusion “FEIE.” In tax law, generalizations can be dangerous. Oftentimes they may lead to misunderstandings and “suboptimal results”—audits, assessment of tax, penalties, and interest. This is just an outline.

Today I will explain one of the tests to be eligible for FEIE (there’s another test; “bona fide residence”—to be explained another day). First, some preliminaries: the exclusion refers to foreign earned income. That means income is from foreign sources, using rules that determine the “source.” Things such as wages and self-employment income are sourced where the work is actually done. If your income is realized in a foreign country, voilà—it is foreign sourced.

FEIE income must also be “earned”. Pensions, royalties, interest and dividends are “unearned.” If you can sit in the couch all day and the income arrives anyway, it is probably “unearned” and doesn’t count.

Not everyone with foreign earned income can exclude. Only individuals that meet tests that look into their presence in a foreign country or countries qualify.

One of the tests is “physical presence.” A person must be physically present in a foreign country or countries for at least 330 days out of a 12-month period. People generalize this as a “year” but this is not so. The 12-month period can begin anytime but months must be consecutive. The first day of the “month” can be any day, ending 12 months later. They don’t have to be the first day of a month.

The 330 days need not be consecutive but must be full 24-hour days spent in a foreign country or countries. Also, you could be in the foreign country for any reason—even vacation.

Your 12-month period does not need to be the same in subsequent years. In fact, your 12-month selections can overlap. This allows flexibility in travel to the US. Documentation needs to be kept to prove the day computation.

How much is this hassle worth? For 2017 the maximum FEIE amount is $102,100 of excludable income. Other details: If applicable, you would still be on the hook for Self Employment tax. States may not care about FEIE, requiring you to add it back to their own tax computations. Claiming FEIE makes you ineligible for child tax credits. IRS Publication 54 has all the details. Easy Peasy!

Orlando Gotay is a California licensed tax attorney (with a Master of Laws in Taxation) admitted to practice before the IRS, the U.S. Tax Court and other taxing agencies. His love of things Mexican has led him to devote part of his practice to the tax matters of US expats in Mexico. He can be reached at tax@orlandogotay.com or Facebook: GotayTaxLawyer.

 

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