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Foreign earned income tax exclusion. Residency began in the…

foreign earned income tax exclusion.Residency...
foreign earned income tax exclusion.Residency began in the Cayman Islands in September of 2015. Sept 15 - Sept 16 physical presence test was easily passed. In the past 1.5 years the "bona fide" resident test could easily be passed. What's worrisome is the current situation. We recently bought a house in the USA (back home) in January 2018. While my wife's primary residence is, in fact, the USA home...my bona fide residence is still in the Cayman Islands. However, in the coming months I plan to reduce my 80% time here in the Cayman Islands to possibly 20-30%. I totally understand that once the reduction in time happens that I'll totally not qualify for bona fide residency nor the income tax exclusion.All said here are my questions:1. I've been on payroll by the foreign employer since september 2015. What happens when I drop off payroll and reduce my time from 80% to 20% in the middle of a tax year? Is the portion of the tax year that I was a bona fide resident still qualify? How does this work?2. Even at the 20-30% foreign work level, are there any advantages or ways to take advantage of any foreign income exclusions?3. Has anything changed with the tax code related to foreign earned income since the new tax bill was passed. If so please point me in the direction to become familiar with the newest rules.
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Answered in 4 hours by:
3/12/2018
bkb1956
bkb1956, Finance Enthusiast
Category: Finance
Satisfied Customers: 6,370
Experience: IRS Enrolled Agent, 20+ years of experience in tax preparation with associated finance experience.
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Welcome to Just Answer. My name is ***** ***** I will be happy to assist you.

As to your questions 1 and 2,

To claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, you must have foreign earned income, your tax home must be in a foreign country, and you must be one of the following:

  • A U.S. citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year,
  • A U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year, or
  • A U.S. citizen or a U.S. resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.

https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion

As to your question 3,

No changes were made to the Foreign Earned Income Exclusion by the tax reform bill passed in December, 2017.

Please let me know if I can assist you further.

Thank you and best regards,

Barb

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Customer reply replied 4 months ago
Barbara,
I'm very aware of those laws and have seen those bullets a time or two myself. I was asking for more direct feedback regarding my actual situation.

Those laws affect your specific situation, and I would have no way of knowing what you know or do not know.

Based on the information you provided, you would not be able to claim the foreign earned income exclusion.

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Customer reply replied 4 months ago
Barbara, I have claimed it for a couple years now, and was looking for more guidance. I guess it's ok, I'll seek guidance elsewhere, thanks.
taxmanrog
taxmanrog, Certified Public Accountant (CPA)
Category: Finance
Satisfied Customers: 1,133
Experience: Licensed CPA, MA, MST with 31 years' experience. Teach Accounting and Tax courses at Masters level.
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Hi! Different expert here. I've been working in international taxation for over 31 years, and have worked with literally thousands of expats over the years.

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You are correct in your analysis about loosing the §911 foreign earned income exclusion (FEIE). Before you can even look at the Bona Fide Resident (BFR) test or the Physical Presence (PP) test, you have to look at your regular place of abode, where your home is in the real sense of the word. IF your abode is in the USA, even if you meet the PP test, you will not qualify for the exclusion, because IRC §911 requires you to NOT have an abode in the USA.

There was a recent case right on this issue. Lock II v. Commissioner, TC Summary Opinion 2017-10, held that the Taxpayer's abode was in the USA even though he had met the PP test. The taxpayer's house, wife, children bank accounts, church, etc, were all in Florida. The taxpayer took his R&R leaves to Florida. The US Tax Court said his abode/home was in the USA.

You will qualify for the Exclusion until your work ends, and you start spending more time in the USA. When that will actually be is difficult to say, as it is based on facts and circumstances, and your intent.

Once you start spending the majority of your time in the US, it would be hard to still claim any exclusion. As the case says, if your abode is in the USA, you do not qualify at all, even if you have sufficient time, which you won't.

And to answer your third question, there is nothing in the new tax bill that will affect the FEIE. The only thing that might affect you is if you own any foreign corporations with accumulated earnings & profits (you will be hit with the new §965A repatriation tax).

I hope this has answered your question. If you have any more, please feel free to ask and I will be happy to answer.

Thanks! Have a great week!

Roger

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Customer reply replied 4 months ago
This is great feedback. I have for sure had cayman as my bona fide residence for quite some time now. The first year and possibly the second year I did in fact pass the physical presence test. I guess my biggest concern is that since I'm being paid every two weeks offshore right now with no withholdings...what will happen with a middle of the year change in my status? Bona fide residency typically applies to an entire tax year but what about a part thereof when prior years were, in fact, authentically bonafide. I'm trying to avoid the tax event before there is one and I definitely dont want the answer to be remain mostly in cayman for the rest of the year.
Bona fide residence once met is retroactive to the first day that you arrived in the foreign country, and continues to the last day that you leave. So if for example on July 15th you moved back to the United States, your bona fide residence would end on that date.What you are referring to is the initial requirement of living in the foreign country on January 1st and on December 31st at the same tax year. However, once that test is met, you're bona fide residence stays in effect until the day you leave. The exclusion is prorated based on the number of days in the tax year that you were a bona fide resident.
taxmanrog
taxmanrog, Certified Public Accountant (CPA)
Category: Finance
Satisfied Customers: 1,133
Experience: Licensed CPA, MA, MST with 31 years' experience. Teach Accounting and Tax courses at Masters level.
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Customer reply replied 4 months ago
Much better response than the prior. I know what we have to do now. Glad I asked for a second opinion and got you. Thanks so much.

You are very welcome. If you have any questions in the future, please feel free to ask for me. Without bragging, I think I am probably the most experienced international expert on this site.

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