US taxpayers living overseas are usually somewhat familiar with the benefits of the foreign earned income and the foreign housing exclusion. Given that it’s tax filing time, it’s the perfect opportunity to review some of the rules pertaining to these important benefits. Today’s blog post will examine how the foreign earned income and housing exclusion rules will apply in 2017, given the inflation adjustments and Internal Revenue Service (IRS) housing cost adjustments for high rent cities.
It will also look at two recent developments in this area. First, the newest “Residence Based Taxation” (RBT) proposal espoused by the American Citizens Abroad (ACA) which advocates eliminating these foreign exclusion benefits entirely (yes, it’s true)! It will also examine a very recent case, Lock v. Commissioner, decided earlier this month and illustrating the slippery “tax home” concept.
Section 911 of the US Internal Revenue Code permits a qualified individual to make an election in order to exclude certain amounts from his gross income. Generally, in order to qualify, the taxpayer is required to have a “tax home” in a foreign country and must meet either the so-called “bona fide residence” test or the “physical presence” test. He must file a tax return to claim the exclusion benefits. If an individual meets the qualification rules, he can exclude from gross income an “Exclusion Amount” related to “foreign earned income”. Foreign earned income includes amounts paid by the employer such as salary, bonuses, the cost of air tickets home, tuition costs for children and so on. Section 911 also permits an election to be made for exclusion from income for a “Housing Cost Amount”. The Housing Cost Amount relates to housing expenses provided by an employer for housing expenses incurred by the employee while living overseas.
These amounts are adjusted annually for inflation. For 2017, the Exclusion Amount (commonly called the “Foreign Earned Income Exclusion” or “FEIE”) is $102,100. Calculation of the Housing Cost Amount is a bit more complicated and is examined below.
Calculation of the Housing Cost Amount depends on determining (A) the “Housing Expenses” of the taxpayer for the taxable year, and subtracting from it (B) a “base amount” that is equal to 16% of the FEIE (the 2017 “base amount” would be $16,336; calculated as $102,100 x 16%).
Housing Expenses are subject to a ceiling. They are generally limited to an amount equal to 30% of the relevant tax year’s FEIE amount (this number is $30,630 for 2017, calculated as $102,100 x 30%). Thus, in the general case, the maximum Housing Cost Amount for 2017 which is excludible from income would be $14,294 (Housing Expense ceiling of $30,630 minus the “base amount” of $16,336).
The IRS annually issues guidance pursuant to Congressional authority, to adjust the ceiling on Housing Expenses based on differences in housing costs in different parts of the world as compared to US housing costs. If a taxpayer lives in a high rent city, he will be permitted a higher Housing Expense (i.e., higher than the general amount of $30,630). The IRS just published Notice 2017-21 to provide adjustments to the limitation on Housing Expenses for high cost rental locations. This Notice lists the different cities in the world where housing costs are higher.
Looking at an individual living in Dubai, for example, the limitation, or ceiling, on Housing Expenses permitted for 2017 for a taxpayer living in Dubai is $57,174 (pretty low if you ask me; the ceiling amount has not changed in years! See e.g., the same amounts were announced by IRS in 2013). Therefore, an individual living in Dubai with housing expenses in 2017 of $57,174 or more could exclude from income a maximum housing amount of only $40,838 ($57,174 ceiling – $16,336 base amount). If the individual pays more in rent than the permissible ceiling amount of $57,174 he is not permitted an exclusion from income for that excess under the Housing Cost Amount. For taxpayers living in Abu Dhabi, the ceiling on Housing Expenses permitted for 2017 is only $49,687 (meaning he can exclude from income a maximum housing amount of only $33,351 ($49,687- $16,336)).
The American Citizens Abroad is a non-profit organization with the stated mission to “educate, advocate and inform” the US government and overseas Americans about issues of concern to the overseas American community.
Currently, ACA is actively working to persuade the US Congress that tax law reform should include residence-based taxation for individuals as well corporations. Currently, Americans living abroad are taxed on the basis of their US citizenship, meaning they are taxed on worldwide income no matter where they live. ACA has been advocating for “residency based taxation” for some time now.
The RBT proposal has many facets. The main thrust is that US citizens and resident aliens, including “green card” holders, would be taxed on a “residency basis”. This means they would generally be taxed by Uncle Sam only on US source income. Not every US person can qualify for RBT, however. An individual will be required to move abroad and remain there for a minimum of 5 years before becoming entitled to the benefits of RBT.
In addition, a most surprising twist to ACA’s most recent RBT proposal is to completely eliminate the foreign earned income and housing exclusions of Section 911. That’s right, as stated by ACA: “Section 911 would be repealed in its entirety. The foreign earned income exclusion and housing cost amount would no longer be available to any taxpayer.” Thus, for example, under the ACA proposal, a teacher from the US who moves abroad to teach for 4 years will neither be eligible for RBT nor have any foreign exclusion benefits (as these will have been repealed). You can obtain all the details about the ACA proposal here.
ACA’s tax-exempt sister organization, American Citizens Abroad Global Foundation, is seeking donations in an urgent “specified-need” fundraising campaign to help promote its RBT proposal. The funds are needed to prepare comprehensive revenue estimates for Congress to demonstrate that a change from the current citizenship-based taxation model to RBT can be accomplished in a “revenue neutral” manner (meaning it will not cost tax dollars if RBT is implemented). The donation request page does not mention elimination of the foreign earned income and housing exclusion benefits of Section 911. You must access the detailed description of ACA’s current RBT proposal to fully understand this nuance.
I could not find a stated rationale for ACA’s proposal to do away with these foreign exclusion benefits, but I suspect it may have to do with ACA’s hope that the RBT will be viewed as a revenue neutral proposal. If it can be demonstrated that the proposal does not cost the Treasury anything in lost revenue, RBT will have a greater chance of being accepted. Eliminating the Section 911 exclusions will certainly be injurious to many taxpayers, but it could help replace any tax dollars lost due to RBT. Maybe this is an example, in Star Trek terms, of what Dr. Spock has said: “Logic clearly dictates that the needs of the many outweigh the needs of the few.”
In order to qualify for any of the foreign income or housing exclusion benefits, the taxpayer is required to have (among other things) a “tax home” in a foreign country. In defining what is meant by a “tax home” the law provides that the taxpayer shall not be treated as having a “tax home” in a foreign country “for any period for which his abode is within the United States.” What is the difference between one’s “tax home” and one’s “abode”?
Under the tax rules, one’s tax home” is defined generally as the main place of business, employment, or post of duty, regardless of where the individual maintains his family home. The tax home test focuses on the place of one’s vocation or employment. It is the place where you are permanently or indefinitely engaged to work as an employee or self-employed individual. If you do not have a regular or main place of business because of the nature of your work, your tax home may be the place where you regularly live. If you do not have either a regular or main place of business or a place where you regularly live, you are considered an “itinerant”. In that case, your tax home is wherever you work.
As mentioned, you are not considered to have a tax home in a foreign country for any period in which your abode is in the United States. Here is where many people can get tripped up. One’s “abode” is generally defined to mean one’s home, habitation, residence, domicile, or place of dwelling. Unlike the term “tax home”, it does not mean the principal place of business. One’s “abode” has a domestic meaning rather than a vocational one. The location of a taxpayer’s abode often depends on where he maintains his economic, family, and personal ties.
In the very recent case of Lock v. Commissioner, the taxpayer, Mr. Lock, was employed by a private security company and US Government contractor to provide security in Iraq (and sometimes Israel) for Department of State personnel and other high-ranking US government officials. As conditions of his employment, Mr. Lock was required to maintain a valid US tourist passport, a valid US driver’s license, and a bank account to facilitate electronic deposits of his paychecks. The Iraqi Ministry of Interior issued a series of entry and exit visas to Mr. Lock that allowed him to travel to and from Iraq for periods that normally lasted no more than 12 months. Mr. Lock’s wife and son were not permitted to accompany him and they continued to live in the family home in Florida.
The security company provided Mr. Lock with very modest living quarters. He did not immerse himself in the local culture or social life and primarily associated with his fellow American work colleagues. He spent all of his vacation time (approximately 10 weeks per year) by visiting his family and friends in Florida. Mr. Lock was registered to vote in Florida, maintained a Florida driver’s license, owned two trucks, a boat, and a trailer which were all kept in Florida, and kept many firearms in the Florida home as well. In addition, he spent significant time each year managing certain Florida rental properties with a business partner.
The court determined that throughout the period in question Mr. Lock maintained extensive familial, economic, and personal ties to the United States, while his ties to Iraq were quite limited and tied only to his employment. Based on these facts, the court held that the taxpayer’s abode continued to be in the United States. As a result, the taxpayer was denied eligibility for the foreign earned income exclusion.
The information provided in this article is for general information purposes only. The information is not intended to be comprehensive or to include advice on which you may rely. You should always consult a suitably qualified professional on any specific matter.
Virginia La Torre Jeker J.D.
Virginia La Torre Jeker J.D., is based in Dubai. Virginia has been a member of the New York Bar since 1984 and is also admitted to practice before the United States Tax Court. She has over 30 years of experience specializing in the international aspects of US tax, including FATCA. She has been quoted in the New York Times and Newsweek, and is regularly quoted in many local news articles and publications."
Maastricht University - 5th Global Tax Policy Conference: Tax Policy after BEPS, what can be expected? On 6 September 2019 at the Royal Museums of Arts and History in Brussels, Prof. Dr Hans van den Hurk, chairman of the Annual Global Tax Policy Conference of the Maastricht Centre for Taxation (Maastricht University) with his esteem speakers are addressing the above question.Read more