A client of mine is owner, officer, and sole employee of an S-Corp. His business involves working with clients both in the US and in Europe. He typically spends 6-7 weeks of each year in the US (usually broken between two trips) and the rest of the time in Europe. While in the US, he lives in a house he owns in California and uses a home office there. While abroad, he resides in an East European country, let us say Poland, and lives with his fiancee, a Polish citizen, whom he has married in 2013. His income is principally his salary (including health care benefits) and net profits from the corporation. The ratio of the two will vary, depending on how good a year he has had. He has never paid Polish income taxes, taking a "don't ask don't tell" attitude. So far, the Polish authorities haven't bothered him.
He has always considered his tax home to be in California, and the corporation has reimbursed him for living expenses abroad and for his home-office expenses. It seems to me that it would be more defensible for him to claim Poland as his tax home, though this would cost him the deduction for living expenses, as well as most of the home office deduction. If he did that, he would obviously like to be able to claim the foreign earned income exclusion. He spends too much time in the US to satisfy the Physical Presence Test. In many respects, he would satisfy the Bona Fide Residence Test, the big sticking point in my mind being the question of taxes. It is not clear to me how he could honestly and comfortably answer questions 13a and 13b on Form 2555. ("I don't know!" is not an option for question 13b.)
In any case, they can file an election, apply for an ITIN for his wife, and file jointly. His wife can certainly exclude her earned income.
What advice would you give this client?
He has always considered his tax home to be in California, and the corporation has reimbursed him for living expenses abroad and for his home-office expenses. It seems to me that it would be more defensible for him to claim Poland as his tax home, though this would cost him the deduction for living expenses, as well as most of the home office deduction. If he did that, he would obviously like to be able to claim the foreign earned income exclusion. He spends too much time in the US to satisfy the Physical Presence Test. In many respects, he would satisfy the Bona Fide Residence Test, the big sticking point in my mind being the question of taxes. It is not clear to me how he could honestly and comfortably answer questions 13a and 13b on Form 2555. ("I don't know!" is not an option for question 13b.)
In any case, they can file an election, apply for an ITIN for his wife, and file jointly. His wife can certainly exclude her earned income.
What advice would you give this client?
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