Crew members who spend a majority of their time in a foreign country or its territorial waters often seek guidance with regards to foreign-earned income exclusion (FEIE). A common misconception is that if an American lives outside the US for more than 183 days, they automatically qualify. This myth is perpetuated by the fact that some countries allow their citizens to file as nonresidents if they leave their tax residence for more than six months.
Living outside the US for 183 days will not exempt you from taxes, but there is a provision of the tax code that allows Americans to exclude from gross income up to $126,500 of foreign-earned income in 2024, as well as certain employer-provided housing costs. In order to qualify, an individual’s tax home must be in a foreign country and meet either a residence or physical presence test.
Most yacht crew will not qualify for FEIE based on foreign residency. Normally crew qualify for the exclusion under the physical presence test, which requires that the crew member be in a foreign country or the territorial waters of a foreign country for 330 out of 365 days. Time spent in international waters does not count towards the exclusion as it is considered time spent in the US. To be considered present in a foreign country, you must be in that country for a 24-hour period.
The burden of proof is on the taxpayer to provide evidence to support the claim. 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 US passport information, captain’s log and an affidavit from employer. I recommend keeping hold of documentation that supports the claim of a foreign-earned income exclusion.
For a comprehensive discussion regarding the FEIE, review Publication 54 on the IRS website: irs.gov/publications/p54
A determination of whether a taxpayer qualifies is based on all the facts and circumstances including but not limited to:
- The taxpayer’s intention;
- The length of stay in a foreign country;
- The nature and duration of employment;
- The establishment of a home in the foreign country;
- The extent and reasons for the absence.
This article was originally published in the April 2024 issue of Dockwalk.