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My wife and I are US citizens, and plan to live and work in

the Cayman Islands where there...
My wife and I are US citizens, and plan to live and work in the Cayman Islands where there are no taxes. Since we will be outside the US the full tax year, I understand we will be able to utilize the Foreign Earned Income Exclusion, which I believe will be $95.000 per person in 2012.

The question I have is we both receive $85,000 in salary and an additional per diem for meals and incidentals, and our housing will be paid for by our employer. The per diem, or housing benefit will not be listed on our W2s, and we are wondering if we will need to include them in with our salary when we apply the exclusion? Meaning if we are paid a salary of $85,000 and the per diem based on the 88/93 per day depending on the high or low season posted with http://aoprals.state.gov/web920/per_diem.asp website for the Cayman Islands, or around $33,000 for each of us for meals and incidentals, would we have an earned income of $85,000 or $85,000 plus $33,000 for $118,000 which we would deduct the exclusion of $95,000 from, leaving us $13,000 each to pay taxes on, or is it that we deduct the exclusion only from our $85,000 salary leaving no income to be taxed?
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Answered in 12 minutes by:
6/2/2012
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 30,162
Experience: Taxes, Immigration, Labor Relations
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Hi and welcome to Just Answer!
1.

For the person to qualify for the foreign earned income exclusion - he/she should:
-- Work and reside outside the United States for at least 330 days during the year(Physical Presence test), or
-- Meet either the Bona Fide test.
If the person qualifies, he/she may exclude up to $92,900 (2011) in foreign wages. The amount of foreign earned income exclusion fro 2012 is $95,100

To receive that exclusion - the taxpayer should file either form 2555 or 2555EZ. Here are forms you likely need:Form 2555 Instruction 2555

Please be aware that - the exclusion above will not affect self-employment taxes - only income taxes. Only earned income is excludable - income from wages and self-employment. For instance - dividends, investment income, rental income, pensions, etc - are not excludable.

2.

You absolutely may deduct your qualified travel expenses including per diem.

Once you have determined that you are traveling away from your tax home, you can determine what travel expenses are deductible.

You can deduct ordinary and necessary expenses you have when you travel away from home on business. The type of expense you can deduct depends on the facts and your circumstances.

To determine whether you are traveling away from home, you must first determine the location of your tax home. Generally, your tax home is your regular place of business or post of duty, regardless of where you maintain your family home. It includes the entire city or general area in which your business or work is located.

If your assignment or job away from your main place of work is temporary, your tax home does not change. You are considered to be away from home for the whole period you are away from your main place of work. You can deduct your travel expenses if they otherwise qualify for deduction. Generally, a temporary assignment in a single location is one that is realistically expected to last (and does in fact last) for 1 year or less.

However, if your assignment or job is indefinite, the location of the assignment or job becomes your new tax home and you cannot deduct your travel expenses while there. An assignment or job in a single location is considered indefinite if it is realistically expected to last for more than 1 year, whether or not it actually lasts for more than 1 year.

That means - your employer will be required to report your per diem as wages on W2 form if your assignment will be more than a year..

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Customer reply replied 5 years ago
Currently our tax home is in Russia and we will be in the Cayman Island 9 months out of the year, and then returning every summer to Russia. Is it my decision to keep my tax home in Russia, and if I do that then am I correct that the housing and per diem while away in the Cayman Islands will not be included in income to us? Is this true still if we do this year after year, or will the IRS make us have the Cayman Islands our tax home?
Customer reply replied 5 years ago
Additionally, we own a home in Russia and when we leave the Cayman Islands we will not have a lease or property left behind there, and each year we must reapply to be able to obtain permit to live and work there. I am not sure if that makes any difference, in deciding if the per diem is to be included or excluded while we are there in the Cayman Islands.
Robin D.
Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 15,888
Experience: 15years with H & R Block. Divisional leader, Instructor
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Hello,

It does not make a difference because your are claiming your tax home out of the US but your income to claim for US purpsoes should include all amounts.

The fair market value of property or facilities provided to you by your employer in the form of lodging, meals, or use of a car is earned income and should be included with your wages when you complete your US tax return.

The housing exclusion will then apply to amounts considered paid for with employer-provided amounts, which includes any amounts paid to you or paid or incurred on your behalf by your employer that are taxable foreign earned income to you for the year (without regard to the foreign earned income exclusion).

So although you will need to include the amount in wages you can use the housing exclusion which will help you in not paying US tax especially if your total earned income is over the limit to exclude ($95,100 for 2012).

I think with what Lev has advised and the additional info I have given you, the understanding about your situation should be clearer.

Robin D.
Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 15,888
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I appreciate Robin for cover me while away...

However the main issue in your situation as seems to me - not where you live.
If you meet certain requirements, you may qualify for the foreign earned income and foreign housing exclusions and the foreign housing deduction.
In fact, only a qualifying individual with qualifying income may elect to exclude foreign earned income and this exclusion applies only if a tax return is filed and the income is reported.

The source of your earned income is the place where you perform the services for which you received the income. Foreign earned income is income you receive for performing personal services in a foreign country. Where or how you are paid has no effect on the source of the income. For example, income you receive for work done in France is income from a foreign source even if the income is paid directly to your bank account in the United States and your employer is located in New York City.


If your employer reports your workplace in the US - and just simply allows you to work from any location around the world - in case of audit - the IRS agent most likely will object that compensation is a foreign earned income.
You should be registered in the Cayman Island as residents and pay local employment and income taxes as residents.
Let me know if you need any help.
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