Thursday, April 4, 2013

Does A Flight Attendant In Hong Kong Have Foreign Income?

I am going to put you on the spot. I will give you some facts and present a tax issue for you.

Yen-Ling is a U.S. citizen. She is an expat living in Hong Kong. She works international flights for an airline, and her flights include
  • Hong Kong to/from San Francisco
  • Hong Kong to/from Chicago
  • Hong Kong to/from Ho Chi Minh City
  • San Francisco to/from Nagoya
 What tax issues do you see?
·        Hong Kong is a red herring. As a U.S. citizen, she has to pay income taxes on her worldwide income.
·       She however does get some tax relief from the double taxation this would otherwise entail. She gets to offset her Hong Kong taxes against her otherwise payable U.S. income taxes. This is the “foreign tax credit.”
 You are doing well. Anything else?
·        I recall a “foreign income” exclusion in the tax code. I am a bit fuzzy on it, though.
Good catch. A U.S. citizen who both lives and works overseas can exclude a certain amount of his/her salary from U.S. tax. This amount is not chump-change. For 2013, for example, the maximum foreign income exclusion is $97,600.

Is all of her income foreign? She does live in Hong Kong.
·       Wait, she comes into and out of the U.S. on a regular basis. Some of her income has to be U.S. source.
You are right. How to do you propose to allocate it?
·        Hopefully the airline sent her something – maybe a breakdown of her flight and service hours.
Let’s say they do and it looks something like this:
  • Hours in U.S.
  • Hours in Vietnam
  • Hours in Japan
  • Hours in Hong Kong
  • Hours in international air space
 Her total hours are 1,960 hours. How do you propose to calculate this?
 ·        I propose to divide her hours in the U.S. into 1,960 total hours.
Seems reasonable. But ...

... you would be wrong. Not surprisingly, there has been litigation on this.

The Code defines "foreign earned income” as “the amount received by such individual from sources within a foreign country.”
·        So? She did not earn it within the U.S., so how can it be anything other than “foreign?”
Take a look at the wording in the following Regulation:
  • The term ‘foreign country’ when used in a geographical sense includes any territory under the sovereignty of a government other than that of the United States.”
Did you pick up on the tax hook?
 ·        You mean the word “sovereignty?”
That’s it. Under whose sovereignty is international airspace?
·        No one’s. That is why it is international.

Is her time in international airspace considered time in a “foreign country?”
·        That is ridiculous. According to this reasoning, an American on the moon would have all his/her income considered U.S. source.
You are right that this is ridiculous, but an American living (and working) on the moon would have U.S. source income. He/she would not have a foreign income exclusion, as he/she would not have foreign income.
·        Who dreamed this up?
To some extent, it is an unfortunate by-product of the U.S. worldwide tax system. It borders on the intellectually incoherent, which is why virtually all other advanced nations eschew it in favor of a territorial tax system.
·        How did it turn out for the flight attendant?
She got hosed. You can read about it at Rogers v Commissioner.
·        I could but I won’t.

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