A client left the U.S. and arrived in Japan on November 24, 2018. He worked there without leaving the country and will leave Japan on November 22, 2019. Since the Physical Presence test defines a day starting at midnight, I calculate he has been there a total of 331 days. Further, the total period of 330 + 1 day overlaps two calendar years, I am trying to determine how the foreign income exclusion will be calculated for 2018 and later on 2019. I have reviewed IRS Form 2555 and I need to work this further. In the description of Physical Presence for 2018, I see where it says the period of 330 days only needs to begin or end in 2018. Any advice on how the exclusion of income will work for 2018 and 2019 is appreciated.
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Study IRS Pub. 54. Basically, once you qualify with the PPT of 330 out of any 365 day period, you then prorate the maximum EEC by a ratio of the # of days in the foreign county/365 for each year. So, your client will have a smaller fraction in 2018 and a larger fraction in 2019. I can't explain it as well as Pub. 54. I've only dealt with a partial calendar year out of this country once a few years ago. Although, I will have the corresponding return in 2020. Someone who's a better teacher on this topic will jump on here, hopefully. -
At first glance, I don't think he qualifies.
Besides meeting the Physical Presence Text, his "Tax Home" must be in the foreign country. The fact he was there for less than one full year makes it rather questionable if his "Tax Home" was in Japan or not.
*IF* he does qualify (which I suspect he does not), then it works this way:
He was in Japan for 37 days in 2018. Add 35 days to that to get 72 days (to maximize the 330 day window, you would select something like 10/21/2018 through 10/20/2019, which is 72 days in 2018). The maximum exclusion in 2018 is $104,100. So you can exclude up to 72/365ths of $104,100.
You would use a similar process for 2019.Comment
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Did you file Form 2350 to extend your time to see if you meet the physical presence test?Comment
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Paper trail your Adobe. If he had the foresight to rent his U.S. house out, "get a library card" and make other Japanese residency connections he might be ok. Abode Creation became an even more important tax planning skill on 1/1/2018. https://www.irs.gov/individuals/inte...oreign-country"Dude, you are correct" Rapid RobertComment
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I read IRS Pub. 54, page 12, Tax Home. It seems to me that my client may not meet the requirements for a tax home because he still has a home in the U.S. which he will return to in November. His wife and children have been living here in the U.S in the home he will return to. He is not in the military. The pub.54 says in part, "a tax home is where you are permanently or indefinitely engaged in work". Also, it says, "you aren't considered to have a tax home in a foreign country for any period if your abode is in the United States unless you are serving in support of the U.S. Armed Forces in an area designated as a combat zone". Thus, I conclude he does not qualify for the foreign income exclusion. Please let me know if I have misinterpreted the definition of "tax home".
Thank you NY Enrolled Agent for telling me about Form 2350; I will take care of having that done.
Thanks to all who are helping me on this matter.
CarlComment
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I agree. If you continue that on page 13 of Publication 54, it talks about the Temporary (1 year or less) versus Indefinite Assignment (1 year or more) that contributes to determining the Tax Home, which gives further weight that the foreign country is not his Tax Home.
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Is he paying taxes to Japan? The foreign tax credit can help him.Comment
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As I read page 13 of Pub. 54, I see if the employment is indefinite and one is there for one year or more then this meets the qualification for a tax home. If the assignment is temporary, it does not meet the tax home definition. Correct?Comment
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Yes, that is correct.Comment
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Might behoove him to stay over a few more days.......Comment
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Just staying a few extra days (to make it over 1 year) won't change things. That is just adding a few days of vacation after a temporary assignment.
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"Dude, you are correct" Rapid RobertComment
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Reaching the 330 days may establish the physical presence test but there is one more consideration.
A taxpayer cannot have a tax home in the foreign country if the taxpayer has an abode in the United States. See ยง911(d)(3) [limited exceptions]. Foren touched on it but seemed to abandon that important idea.Comment
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I meant continuing his employment to meet the over-1-year status for "indefinite" consideration. I agree that having a home to come back to throws a monkey wrench into things.Comment
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