What “Abode” Means for the Foreign Earned Income ExclusionSeptember 29, 2017 - Phil HodgenFriday Edition
The foreign earned income exclusion is a marvelous thing for Americans abroad. It eliminates income tax entirely on a fairly large chunk of income.
Americans pay tax to the USA on all of their income, no matter where they are on the planet, and where they earn their income.
The United States is unlike (almost) every other country by having this method of taxation. Other countries have an immensely practical and sane approach to income tax: “If you live here, you pay tax here. If you don’t live here, you don’t pay tax here.”
To soften the blow, the foreign earned income exclusion says Americans living abroad will not pay income tax on up to $102,100 of earned income (salary, self-employment) in 2017. Go look at Form 2555. This is where all the fun and games can be found.
How to Qualify for the Exclusion
To make the foreign earned income exclusion work for you, there are two things you need to do:
- Prove to the IRS that you qualify to claim the foreign earned income exclusion; then
- Do some math to see how much foreign earned income you can exclude from taxation.
Let’s ignore the math part.
To prove that you are eligible for the foreign earned income exclusion, you must demonstrate two things:
- Your tax home is outside the United States; and
- Either you spent a sufficient number of days outside the USA (the “physical presence” test) or you are a really-truly resident of a country outside the United States (the “bona fide resident” test).
Linde v. Commissioner (2017)
Jesse Linde is a helicopter pilot, and worked in Iraq. His family remained in the United States while he worked abroad.
Mr. Linde claimed the foreign earned income exclusion for salary he earned in 2010, 2011, and 2012. The IRS rejected the claim. Hilarity ensued in the audit, I’m sure. It’s 2017, after all, and they are fighting about 2010 tax bills).
All of the wrangling ended abruptly when the metaphorical fat lady sings: the Tax Court agreed with Mr. Linde in Linde v. Commissioner, T.C. Memo. 2017-180 (2017) and disagreed with the IRS. A taxpayer victory. (We like that.)
The critical questions for the Court to decide were:
- Where is Mr. Linde’s “tax home”?
- Was Mr. Linde a “bona fide resident” of Iraq?
My suggestion: read the opinion. The judge laid out the law clearly and concisely. You’ll get a pain-free introduction to how to qualify for the foreign earned income exclusion.
I am going to talk here only about the “tax home” question, in the interests of brevity.
Tax Home Outside the United States
This is the first of the two requirements to qualify for the foreign earned income exclusion: your tax home must be outside the United States.
Place of Employment
Your “tax home” is where you work.1 Your regular place of employment. If you are employed outside the United States, your “tax home” is outside the United States. Easy, right?
Unless You Have an “Abode” in the USA
Tax law doesn’t live on the same planet as “simple”, so there’s an exception to the rule.
Your tax home is where you work, and if you work abroad, then your tax home is abroad . . . unless you have an “abode” in the United States.2
Funny (!)3 how the Internal Revenue Code imposes a requirement (“abode”) but does not provide a definition of the word. Nor can you find a definition of “abode” in the Treasury Regulations.
The opinion in Linde v. Commissioner helps us out. “Abode” means comparing the taxpayer’s domestic ties to the foreign country and to the United States:
In prior section 911 cases, we have examined and contrasted a taxpayer’s domestic ties (i.e., his familial, economic, and personal ties to the United States) with his ties to the foreign country in which he claims a tax home in order to determine whether his abode was in the United States during a particular period.
After a string of citations to prior Tax Court cases, the judge tells us what it means to have an abode in the United States. (Remember: if you have an abode in the United States, you cannot have a tax home abroad, even if you are working there).
Even though a taxpayer may have some limited ties to a foreign country during a particular period, if the taxpayer’s ties to the United States remain strong, we have held that his abode remained in the United States, especially when his ties to the foreign country were transitory or limited during that period.
So that’s what it comes down to. In order to persuade the IRS that your “tax home” is outside the United States, you must get into the touchy-feely, fuzzy-wuzzy, mumbo-jumbo, weasely-peasely discussion of an inherently unquantifiable question. How strong are your ties to the foreign country? How strong are your ties to the United States? Compare and contrast.
Hey. Good luck with that.
Read the opinion to see how the Tax Court decided on these facts. It seems to me that the Judge took the extra effort to interpret reality in favor of Mr. Linde:
Considering the unique facts and circumstances of this case, including Mr. Linde’s continuous employment in Iraq up to the date of trial, we find that Mr. Linde’s ties to Iraq were stronger than his ties to the United States during the years in issue. We therefore hold that Mr. Linde’s abode was not in the United States and that his tax home was in Iraq.4
So what can you do? Well, first and foremost, take the family with you and do not have a home available for you in the United States. If you keep your home, rent it out.
The Regulations say that the presence of a home in the United States will not be a defnitive marker of abode:
Maintenance of a dwelling in the United States by an individual, whether or not that dwelling is used by the individual’s spouse and dependents, does not necessarily mean that the individual’s abode is in the United States.5
But think of it this way: it will be hard for the IRS to claim you have strong domestic ties in the United States if your family is abroad and you don’t have a U.S. nest to roost in.