Finance

2021 Foreign-Earned Income Exclusion Update

19 June 2021 By Tom Andrews
Illustrated map of the global currency exchange
iStock/zoljo

This tax advice is not intended, and cannot be used, to avoid any penalties as a result of taking any position from this column. Thomas Andrews is a CPA and a principal of AvMar Accounting Services. +1 954 764 0404; www.avmaraccounting.com

The most common misconception about the foreign-earned income exclusion (FEIE) is that if an American lives outside the United States for more than 183 days, they automatically qualify. Since I get so many questions about the FEIE, I usually update the info each year.

I believe this myth is perpetuated by the fact that some countries allow their citizens to file as nonresidents if they leave their country for more than six months. This naturally leads Americans to believe the U.S. has a similar law. While simply living outside the U.S. for 183 days won’t exempt you from taxes, there’s a provision of the tax code that lets Americans exclude from gross income up to $108,700 (in 2021) of foreign-earned income, as well as certain employer-provided housing costs. 

To qualify for these exclusions and deductions, your tax home must be in a foreign country and must meet either a residence or physical presence test. A determination of whether a taxpayer qualifies is based on all the facts and circumstances including:  

  • Taxpayer’s intention
  • Length of stay in a foreign country
  • The nature and duration of employment
  • The establishment of a home in the foreign country 
  • The nature, extent, and reasons for temporary absences from the foreign home

Most crew will not qualify for the FEIE based on foreign residency. Simply living on a vessel while passing through or anchored in foreign jurisdictions doesn’t make you a tax resident of that country. 

Normally, crew qualify for the exclusion under the “physical presence test,” which requires them to live and work outside the U.S. for 330 out of 365 days. Furthermore, time spent in international waters doesn’t count (and is considered the same as being present in the U.S.). You must also be in the territorial waters of a sovereign foreign county during this time. To be considered present in a foreign country, you must be in that country for a full 24-hour period. If you arrive in the U.S. one minute before midnight, you’re considered present in the U.S. for that day. The burden of proof is on you to provide documentation to support the FEIE (i.e. you must have adequate documentation). 

The IRS plans to improve compliance on international issues and expects to increase the use of foreign information documents and data sharing with other federal agencies. For instance, travel dates may be verified with U.S. passport info, captain’s logs, and affidavits from employers. That’s why crew should keep a diary with all proper documentation that supports the claim of a FEIE. Normally, an audit takes place several years later, and by then, you may have already left the vessel without access to all the necessary documentation needed to support a claim for the FEIE.  

For more information regarding the FEIE, visit irs.gov and review Publication 54.  

This column originally ran in the June 2021 issue of Dockwalk.

 

More from Dockwalk