We have a
client who worked as a contractor in Afghanistan last year.
Let’s talk foreign
income exclusion.
There are
ropes.
The first is
simple: to get to that exclusion you (a) must be a bona fide resident of a
foreign country or (b) you have to be outside the United States for a certain
number of days.
The bona
fide exception is few and far between, and I doubt Afghanistan-as-a-destination
would ever enter the conversation. In my experience, bona fide means a military,
military-contractor or foreign service person (or family) who went overseas and
did not return. There are only so many of those folks.
Nope, you
and I (likely) have to meet a second test: the “physical presence” test. You
and I have to be outside the United States for at least 330 days in a 365-day
stretch.
A few things
about this:
(1) 365 days does not necessarily mean a calendar year. It just needs to be 365 successive
days. It does not have to end on December 31 or start on January 1.
(2) Let’s say that you are overseas for
years. You can reset that 365-day period every year, as long as you can get to 330
days each time you reset.
(3) It does not mean that you have to be
in the same country for 330 days. It just means that you have to be outside the
United States. You can travel like a fiend – as long as you do not come back to
the U.S.
(4) This is an all-or-nothing test. Botch
the 330 days and you get nothing. There is no participation trophy here.
The maximum 2016
foreign income exclusion is $100,800.
Wait! There is
a second calculation.
You have to
prorate $100,800 by the number of days you were outside the U.S.
Huh?
Leave the
U.S. late in the year – say August – and most of the exclusion disappears. Why?
An August departure means the most you can claim is 5/12 of the maximum
exclusion.
This second
calculation very much means a
calendar year.
And there you
have the reason for much confusion in this area: there are two 12-month tests.
The first one does not care whether your 12 months line-up with the calendar.
The second one definitely means a calendar year.
Let’s recap:
(1) Take a 365-day period. It does not
have to start on January 1; you can start it whenever you want.
a. You need 330 days.
b. Implicit in that statement is that
some of those 330 days may have occurred in the calendar year before or following.
It doesn’t matter. The 365 does not need to be in the same calendar year.
c. Fail this test and you are done.
d. Pass this test and you have a shot at
winning the $100,800 prize.
(2) Next calculate how many days you were
outside the U.S. in 2016. Divide that number by 365, giving you a ratio. We
will call the ratio Mortimer.
a. Multiply Mortimer by $100,800.
b. The result is your maximum 2016 foreign
income exclusion.
The first
year can be a tax surprise for an American working overseas. It was for our
client.
Why?
He was
counting on the full $100,800.
What went
wrong?
He did not
leave the United States until April.
He was not
happy.
