By Anthony Diosdi
If you work and earn money outside the United States, Internal Revenue Code Section 911 may permit you to exclude $105,900 of foreign source income from federal income taxation. The purpose of Internal Revenue Code Section 911 is to mitigate the tax and other economic burdens on U.S. persons working abroad by providing for an exclusion from U.S. of up to a specified amount of foreign earned income and housing costs. Internal Revenue Code Section 911(a)(1) permits a U.S. citizen or U.S. residents (with limitations) who has his or her “tax home” in a foreign country and who meets either of two foreign residence-based eligibility requirements to elect to exclude income from federal income taxation. The amount that can be excluded is up to a stipulated amount of foreign source “earned income,” that is wages, salary or other amounts paid for personal services performed outside the U.S.
In 2019, the stipulated maximum exclusion amount is currently $105,900. If the individual claiming the exclusion is not present in the foreign country for the entire calendar year, the exclusion is prorated by multiplying the maximum allowable exclusion by a fraction of the numerator of which is the number of days the individual taxpayer is present in the foreign country and the denominator of which the total number of days in the taxable year.
Internal Revenue Code Section 911 also provides a separate housing cost allowance for the portion of the calendar year that an individual is present in the foreign country. The housing cost is excluded from taxable gross income under Internal Revenue Code Section 911(a)(2). If an individual elects to exclude housing costs, then the foreign earned income exclusion is limited to the lesser of the exclusion amount (prorated for the number of qualifying days of foreign residence in the calendar year) or the amount of foreign earned income less the excluded housing cost amount.
To qualify for the Section 911 exclusion, an individual must have a “tax home” in a foreign country and either be a bona fide resident of a foreign country for at least an uninterrupted period that includes at least one entire taxable year, or be present in a foreign country or countries for at least 330 full days of any twelve consecutive month period. In addition, the individual must file an election to claim either or both the foreign earned income exclusion or the housing cost amount exclusion.
U.S. citizens who have a tax home in a foreign country and meet either the bona fide foreign residence test or the foreign physical presence test are qualified to elect to exclude their foreign earned income and their housing cost amount from gross income. A U.S. resident alien can qualify for Section 911 benefits under the physical presence test, but Internal Revenue Code Section 911(d)(1)(A) limits the bona fide residence test to U.S. citizens.
The physical presence test requires presence in one or more foreign countries for at least 330 full days during a period of twelve consecutive months. (A full day means a continuous period of 24 hours running from midnight to the following midnight). The days do not have to be consecutive. To qualify under the bona fide residence test, the individual must establish to the Internal Revenue Service’s (“IRS”) satisfaction that he or she has been a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire taxable year. For these purposes, residency is determined under Internal Revenue Code Section 871. Internal Revenue Code Section 871 does not define the term “resident.” Instead, Treasury Regulation Section 1.871-2(b) provides that:
An alien actually present in the United States who is not a mere transient or sojourner is a resident of the United States for purpose of the income tax. Whether he is a transient is determined by his intentions with regard to the length and nature of his stay. A mere floating intention, indefinite as to time, return to another country is not sufficient to constitute him a transient. If he lives in the United States and has no definite intention as to his stay, he is a resident. One who comes to the United States and has no definite intention as to his stay, he is a resident. One who comes to the
United States for a definite purpose which in its nature may be promptly accomplished is a transient; but if his purpose is of such a nature that an extended stay may be promptly accomplished is a transient; but if his purpose is of such a nature that an extended stay may be necessary for its accomplishment, and to that end the alien makes his home temporarily in the United States, he becomes a resident, though it may be his intention at all times to return to his domicile abroad when the purpose for which he
came has been consummated or abandoned.
The determination of bona fide foreign residence for Internal Revenue Code Section 911 purposes accordingly requires both physical presence in that foreign country, and intent to make a home in that foreign country for an indefinite period of time, and depends upon the facts and circumstances of each case. The period of bona fide residence must include the entire tax year, and begins only when the individual reaches the foreign country. Foreign residence is termined by departure when the U.S. person leaves the country with intent not to return to that country.
To use either or both the foreign earned income exclusion or the housing cost amount exclusion, the individual must so elect by filing Form 2555. The foreign earned income exclusion is made separately for each married spouse. This means that married couples working abroad can potentially qualify for double 911 income tax exclusions. An election is not required to claim a deduction for foreign housing costs amounts, but the Income Tax Regulations require individuals’ who claim deductions for foreign housing to provide the IRS with the employer’s name, the foreign country in which the tax home is located, the foreign housing costs, the foreign earned income for the taxable year, and the qualified period of physical presence or residence in the foreign country.
Anyone who has spent time working abroad or plans on spend time working outside the U.S. should consult with a tax attorney well versed in the rules of Internal Revenue Code Section 911. Internal Revenue Code Section 911 could result in substantial tax savings for some U.S. persons working abroad.
Anthony Diosdi is a partner and attorney at Diosdi Ching & Liu, LLP. He represents clients in federal tax controversy matters and federal white-collar criminal defense throughout the United States. Anthony Diosdi may be reached at 415.318.3990 or by email: adiosdi@sftaxcounsel.com.
This article is not legal or tax advice. If you are in need of legal or tax advice, you should immediately consult a licensed attorney.