We get a lot of questions at Greenback from contractors. Here is a scenario we encounter often when talking to contractors moving abroad. Let’s say your company is sending you abroad for 18 months and you plan to keep your US home. What is the impact on expat taxes and will you be able to claim the Foreign Earned Income Exclusion (FEIE) or will the IRS see your US home as your abode?
In addition to the complicated logistics of moving, learning a new language, and adapting to a new culture, you will also need to make sure that you are aware of your US expat tax obligations! Many Americans living in foreign countries choose to keep their US home for one reason or another. Because of this, there are some considerations you will need to make in order to maximize your tax benefits. Where will you and your family live while you are working overseas? What will you do with your home in the US while you are working overseas?
Foreign Earned Income Exclusion
Most American expats, both permanent expats and temporary expats, know about the Foreign Earned Income Exclusion (FEIE). This exclusion allows for up to $100,800 (for 2015) of wage income to be excluded from taxation. In order to qualify for the exclusion you need to live and work outside the US for 330 days out of a 365 day window (the window does not need to be a calendar year). This qualifying test is called the Physical Presence Test. If your work contract is for 18 months, most likely you will be able to claim the FEIE on more than one tax year, possibly claiming a portion of the FEIE on 3 years of returns.
If your employment contract abroad will be for more than a year and last indefinitely, you may qualify as a Bona Fide Resident and claim the FEIE without having to count days. Your US home may affect how the IRS classifies you for the FEIE. The IRS considers you to only have one abode, and if you are claiming that you are a Bona Fide Resident of a foreign country, then you cannot have an abode in the US.
Abode vs Tax Home
The meaning of abode is different than that of tax home. An abode has more to do with where your ties are, where you maintain your economic, family, and personal ties. A tax home is where you primarily live and work, but does not have to be where your family lives. If you live in a foreign country but your family and all your ties are in the US, you abode may be in the US. If you can show that you are living in the foreign country just as you would in the states (living in regular housing, have local bank accounts for convenience, and are integrating into society), but your family chose not to live with you, then your abode would be the foreign country. There is no clear IRS definition of abode; the IRS will look at the totality of your situation.
Keeping Your Home in the US
Choosing to keep your home in the US does not automatically disqualify you from having a foreign abode and claiming the Foreign Earned Income Exclusion. You can choose to rent out the house, have relatives live in the house while you are not there, or leave the house vacant. If you choose to keep the house, and your immediate family members live in the house, then the IRS may request more proof from you that your abode is in another country. You should keep records of your home in the foreign country including rent receipts/contracts, records of foreign IDs obtained, and any other documents that show you were living and integrated in the foreign society.
If you keep this information in mind, keep appropriate records, and work with your tax advisor regarding your particular situation, living and working abroad will not be too “taxing”!
Need help figuring out if you qualify for the Foreign Earned Income Exclusion?
We help expats every day and are experts in expat taxes. If you would like help with your expat tax returns, please contact us.