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A FROEIGN INCOME EXCLUSION

The straight poop on the foreign income exclusion. The controversy is finally settled. Just in time for tax time. There are two tests the physical presence test and the bona fide residence test. To qualify for the foreign income exclusion you must meet only one of these tests. The physical presence test is easy to understand, but hard to do. The bona fide residence is just the opposite.

THE PHYSICAL PRESENCE TEXT

To meet this test, you must be a US citizen or resident alien who is physically present in a foreign country, or countries for at least 330 full days during any period of 12 months in a row. (June to June or July to July, and so on) This test is straightforward, add the number of days up and you either qualify or not. This part of the test is also where most tax advisors fall, because it is the first test in the law and that the advisors simply do not continue to read.

THE BONA FIDE RESIDENCE RULE

This test is very hard to understand, but comparatively easier to do. This is the test where most yachting professionals qualify.

To meet this test, you must be one of the following:
1) A US citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year (January 1 to December 31)

or

2) A US resident alien who is a citizen or national of a country with which the US has an income tax treaty in effect that includes an entire year (January 1 to December 31) See IRS Publication 901, US Tax Treaties, for a list of countries.

There is no specific litmus test to qualifying for the bona fide residence rule. The rule is based on the facts and circumstances at the time in question. The determination involves the taxpayer's intention about the length and nature of the stay. Evidence of your intention may be your words or acts; acts of course speak louder than words. If accomplishing a task (tour of duty) requires an extended, indefinite stay, and you make your tax home in a foreign country (the yacht either in foreign waters or docked in a foreign port)


Your tax home must be in a foreign country or countries throughout your period of bona fide residence or physical presence whichever applies. Your tax home is your regular principal place of business, employment or post of duty, regardless where you maintain your family residence. (The yacht) You are not considered to have a tax home in a foreign country for any period during which your abode is in the US. However, if you are temporarily present in the US, or you maintain a dwelling in the US (whether or not the dwelling is used by your spouse and dependants). It does not necessarily mean that your tax home is in the US during that time.

Of course understanding the foreign income exclusion is the first step. The time requirements is the beginning of the testing to see if a crew actually qualifies for the exclusion (maximum $76,000 per year) There are many other minor points to make when considering the bona fide residence test because it is a test that is based on the intentions of the taxpayer. Intentions are best proved by your acts, for example if you are very heavily involved in local US civic organizations, church, PTA, and politics these are all strikes against you for proving that your intentions were to be out of the US for an indefinite time. However, each of the above examples, do not knock you out totally, they must be considered with the facts and circumstances of each individual case.


Since the bona fide residence rule is one based upon your intentions and not hard core black and white test. Spending time tax planning with a qualified tax advisor will be more than worthwhile. The amount of possible tax savings are significant. An ounce of prevention is worth a pound of cure. Those who fail to plan, plan to fail.

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