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Foreign Earned Income Exclusion -- partial year

Technical topics regarding tax preparation.
#1
ode923  
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Hi all. I'm helping a client who is a US citizen and needs to amend his 2018 taxes.

He moved to the UK 8/1/2018 and began working there immediately.

The UK tax year is April to April. He didn't pay much of any UK tax in 2018 to take a Foreign Tax Credit with. So the Foreign Earned Income Exclusion is key. He earned the equivalent of $80K USD.


What is the correct "test" for him to use? Physical presence, and include days in 2019?

Or bona fide resident?

Thanks in advance for any help.
 

#2
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Usually clients in the UK pay so much tax that the FTC is the first choice. Be careful if you switch form the 2555 to the FTC down the road because that is considered revoking the election.

Watch out, very carefully, for FBAR, 8938, 5471, 8621, and 3520 filing requirements. There is no statute of limitations for these forms when un-filed, and the penalties for not filing them are insane.

From what you said so far, it seems the presence test is more appropriate than the bona-fide.

For his 2018 return, look at the 12-month period from 08/01/2018 to 07/31/2019 and see if he meets the 330-day requirement. Work in and around that 12 month period to find the 12-month period where the most days possible fal into 2018 to where he is present outside of the US for 330 days. Use 2555 to allocate the amount of days in which the 12-month period falls in the 2018 calendar year and claim the partial exclusion accordingly.

The partial allocation is a little tough for most to get their heads around - but its all about "days that the 12 month period fall within the calendar tax year". 12-month periods can overlap form year to year.

There are lots of pitfalls and traps possible here - you just might consider referring the client to an expat expert if you are not really into the research and time costs required to do a good job for him.
 

#3
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ItDepends wrote:Usually clients in the UK pay so much tax that the FTC is the first choice. Be careful if you switch form the 2555 to the FTC down the road because that is considered revoking the election.

Watch out, very carefully, for FBAR, 8938, 5471, 8621, and 3520 filing requirements. There is no statute of limitations for these forms when un-filed, and the penalties for not filing them are insane.

From what you said so far, it seems the presence test is more appropriate than the bona-fide.

For his 2018 return, look at the 12-month period from 08/01/2018 to 07/31/2019 and see if he meets the 330-day requirement. Work in and around that 12 month period to find the 12-month period where the most days possible fal into 2018 to where he is present outside of the US for 330 days. Use 2555 to allocate the amount of days in which the 12-month period falls in the 2018 calendar year and claim the partial exclusion accordingly.

The partial allocation is a little tough for most to get their heads around - but its all about "days that the 12 month period fall within the calendar tax year". 12-month periods can overlap form year to year.

There are lots of pitfalls and traps possible here - you just might consider referring the client to an expat expert if you are not really into the research and time costs required to do a good job for him.


Not an expert in this topic. Just want to learn.

So, as for foreign earned income exclusion (FEIE), there are two steps of determination.

The first step is to look at the period between the taxpayer moves to the foreign country and one year after. If the taxpayer stays in the foreign country for more than 330 days during this period, he is qualified for the exclusion. If not, he is out and there is no need to go to the second step. Lets say he moved to the foreign country was 5-1-2019. The determination period in his case would be 5-1-2019 to 4-30-2020.

If he passes the first step, the second step is to determine the partial exclusion based on the number of days that he was in the foreign country during the tax year. In his case, it would be 245 days in 2019 (5-1-2019 to 12-31-2019). And his 2019 foreign earned income exclusion will be based on 245 days out of 365 days.

Did I get it all correctly?
 

#4
ode923  
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Excellent response -- thank you both.

I actually have a good deal of experience with the FEIE -- but I inherited all of those clients and have never prepared a return for an initial year of the exclusion. So it was smooth sailing for those clients -- someone else handled their initial year of the exclusion.

The client definitely qualifies for both physical presence and bona fide residence if you count August 2018 through August 2019.

One of the limitations is when it asks for the "end date" on the client's UK residence, you can put "Continue" -- but my tax software (Drake) interprets that to be 12/31/2018, not today's date, so it refuses to interpret that as a full year.

In response to your question taxtothebest, that sounds right to me. The confusing part for me is, when it's an ex-pat's initial year doing this like my client, he wouldn't have qualified unless he amended his return.

Let's say he didn't move until November 1st 2018. The 2018 tax return is due April 15 2019 (or June 15 2019 with the overseas extension, or October 15 2019 with the 6-month extension). Yet he wouldn't qualify under either test for a full year until November 1, 2019, which is past any filing deadline.

I think amending in that case is the only way to do it. I suppose that should go in the category with NOL carrybacks as a "routine" reason why someone might need to amend a tax return -- to qualify for FEIE.
 

#5
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I dont think you can use the 12-month rolling non-calendar year period for the bonafide test - only the presence test.
 

#6
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ItDepends, in addition to meet either the bonafide test or the physical presence tax, "tax home" is also another requirement that needs to be met, is it right?

lets say a taxpayer was assigned to work in a foreign country by his US employer. At first, he expected to return in less than one year. But then later situation changed and he had to extend to stay in that foreign country for another year.

For example, he left for the foreign country on 5-1-2019 and originally expected to return to the US by 4-1-2020. But then situation changed and now he will have to stay in that foreign country until 4-1-2021. In this case, does he meet the tax home requirement in the 2019 tax return?
 

#7
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Thanks for bringing that up. :)

There are several things about the situation we didn't discuss, one of them is tax home.

In my opinion (I could certainly be wrong), based on the facts given, his tax home is clearly the UK for the entire period.

The only time I've seen a tax home issue is when I had a millionaire website founder who temporarily lived out of hotels for a couple of years as he traveled the world . He met the presence test but he didn't seem to meet the tax home definition.

Is there a reason to why you think that this client does not meet the tax home requirement? Is it because he was expected to come back?
 

#8
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ItDepends wrote:

Is there a reason to why you think that this client does not meet the tax home requirement? Is it because he was expected to come back?


Yes, what causes my doubt is that he was originally expected to return to the US in 11 months (less than one year). Only situation changed eventually was his assignment to stay in the foreign country extended to become more than one year. I did find the followings on IRS website though:

https://www.irs.gov/individuals/interna ... gn-country

"Temporary or Indefinite Assignment
The location of your tax home often depends on whether your assignment is temporary or indefinite. If you are temporarily absent from your tax home in the United States on business, you do not qualify for the foreign earned income exclusion. If your foreign work assignment is for an indefinite period and your abode is not in the United States, your tax home is in a foreign country.

If you expect your employment away from home in a single location to last, and it does last, for 1 year or less, it is temporary unless facts and circumstances indicate otherwise. If you expect it to last for more than 1 year, it is indefinite.

If you expect your employment to last for 1 year or less, but at some later date you expect it to last longer than 1 year, it is temporary (in the absence of facts and circumstances indicating otherwise) until your expectation changes."


Shall we take the bold part to mean that the assignment becomes 'indefinite' once the expectation changes and the taxpayer will have to stay in the foreign country for more than 1 year?
 

#9
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The "longer than 1 year" only applies in the absence of facts and circumstances that indicate otherwise.

We don't have the facts - so we are making assumptions. But we can do so for the exercise.

The OP says that he moved to the UK and started working there.

I might assume that "moving" means that he moved his abode - which makes the facts and circumstances argumentative and the length of stay less relevant.

This circumstance makes me think that this is his regular place of work - and this is his tax home.

On the other hand, NOT having a tax home in the area that you moved to and in which you work every day, in the way I was taught to interpret the regs, would be in situations like:

Your employer says, "fly here, work here for 3 months, stay in this apartment that we rent for this purpose, and then rotate out and come back home as the next worker puts in 3 months and lives in that same apartment".

Clearly this taxpayer has not moved and this is not his regular place of work. It's also less than 1 year.

or

"I work for a very progressive tech company and my boss is allowing me to work remotely form my laptop as I tour central america to surf for 18 months, but I still technically live in California"

Again, even though we have more than a year and we pass the presence test, we have no regular place of work and he doesn't live there.

I know that abode and tax home are two different things, but the IRS FEIE guidance ties them together a bit.

In those examples, I would argue that there is no tax home in the foreign country.

But with the OP, that's not what I am picturing. I could be wrong about that.

And I could be wrong about pretty much everything I wrote.
 

#10
Guya  
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First question is why there was not enough UK tax withheld under PAYE between 1 August 2018 and 31 December 2018? This is unusual? Was the client self-employed? If so, was he advised to make a payment to HMRC by 31 December 2018?

Moving beyond that, there will be doubtless be excess foreign tax credits from 2019 to be carried back to 2018 making electing for the FEIE unnecessary.

Incidentally, don't overlook ensuring the SFOP is being used to deliver returns to the IRS noting the client is delinquent.
PS – Greeting from London, England! Sometimes it is sunny here too...
 

#11
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Thank you ItDepends.

Guya, if you don't mind, can you address my post #8 about tax home. Thank you in advance.
 

#12
MEMCPA  
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ode923 wrote:In response to your question taxtothebest, that sounds right to me. The confusing part for me is, when it's an ex-pat's initial year doing this like my client, he wouldn't have qualified unless he amended his return.

Let's say he didn't move until November 1st 2018. The 2018 tax return is due April 15 2019 (or June 15 2019 with the overseas extension, or October 15 2019 with the 6-month extension). Yet he wouldn't qualify under either test for a full year until November 1, 2019, which is past any filing deadline.

I think amending in that case is the only way to do it. I suppose that should go in the category with NOL carrybacks as a "routine" reason why someone might need to amend a tax return -- to qualify for FEIE.


There's a form for that - 2350 https://www.irs.gov/pub/irs-pdf/f2350.pdf
 

#13
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I humbly agree with Guya about the lack of tax paid to the UK being odd. Something isn't right here. I was thinking that right away too.

I also feel like if he is not paying tax to the UK that this weakens my tax home debate. It's a fact and circumstance against it.
 

#14
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Perhaps taxpayer should accrue taxes for the FTC, rather than using taxes paid
 

#15
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If he elects to accrue taxes, the taxes will all accrue on April 5, 2019, the end of the UK tax year.
 

#16
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Can anyone in the know give advice on my question in #8? Thank you in advance.
 


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