foreign income exclusion

[Bruce Barker]

If a taxpayer goes to Afghanistan to work as a civilian for a US company for an extended indefinite time period and lives without his family ****location deleted****, Afghanistan With a mailing address of ****address deleted****, and will be present (minus vacations) in Afghanistan from March 2006 through all of 2007, will the taxpayer qualify for tax year 2007 as a bona fide resident? The taxpayer was hired to fill the foreign job position and can stay as long as he chooses to continue with the company. The taxpayer plans on taking a vacation to the US of 40 days in Jul-Aug 2007, and will not qualify under the physical presence test for most of 2007. He could qualify for part of 2007 by using Aug 2007 (after his vacation) through Aug 2008 as the qualifying period but that would exclude less than 1/2 his foreign earned income. For 2006 the taxpayer has qualified under the physical presence test using the period of Mar 2006 to Mar 2007.

His co-workers that he has talked to from around the country (US and working in Afghanistan with him) are qualifying under the bona fide residence test so he asked me about that. I told him that just because others are doing it doesn’t make it right, but I would check into it. I read the instructions for form 2555 as well as pub 54 and came to the conclusion that it was difficult to come to a conclusion. He is there for an indefinite time period longer than 1 year. He returns to his US domicile only for vacation and returns to his Afghanistan residence when he has to return to work. I see that the IRS examples all have families present where the bona fide resident exclusion is allowed, however, there is no example disallowing it for the family not being present also that I could find. Also, he is living in employer provided housing, which could be taken to mean that he is only there temporarily, regardless of the actual time present. However, again I could find no example dealing with employer provided housing and it would only be “a factor” in the overall big picture.

Now since everything is pretty indefinite, would it not be in the best interest of the taxpayer to completely and accurately fill out the form 2555 for the bona fide residence, reasoning since it is not clearly disallowed we ought to let the IRS decide, and their stated method of making a determination is by review of the 2555. Would this approach be allowable and ethical?

Your experiences and/or thoughts?

[Brad Imsdahl]

There is no need to provide a specific location and a specific address to ask your question.

[Bees Knees]

The bona fide resident test is more difficult to establish, as it is subjective in nature. Being gone for 40 days during the year is not a good sign.

The physical presence test only requires 330 full days in the foreign country during 12 consecutive months. The 330 days do not have to be consecutive.

So from March 2006 through March 2007, assuming vacation out of the country are less than 35 days, you qualify for the physical presence test. The 2006 pro-rated amount is 83%, which means you could exclude about $68,667 of earned income for 2006. Even if you tried the bona fide resident route, you still could not exclude any more since you could not argue he was a bona fide resident until March of 2006 (the pro-ration still applies for 2006).

For 2007, you might have a problem after March of 2007 for both tests if he is gone for more than 35 days. I’d advise him to cut short his vacation and never be gone more than 35 days during the year.

[Bruce Barker]

foreign exclusion

His daughter is getting married so he's not going to cut it short. We already filed 2006 and the exclusion of about 83% is correct, but for 2007 the amount would be less than 50% since we would have to use Aug 2007 thorugh Aug 2008 to get the 330 days. That's why we're looking at the bona fide resident test.

So the options are

1. bona fide resident for 2007 or

2. Physical presence for less that 50% of the exclusion

[Bill Tubbs]

2 periods

Sounds like he qualifies under the physical presence test for Jul 06 - Jun 07, plus potentially Aug 07 - Aug 08. That sounds like much more than 50% to me.

Bill

[Bruce Barker]

foreign exclusion

He took a 45 day vacation to the US in Jul 1 - Aug 14, 2007. To reach the 330 day count for 2007 he must start his 12 consecutive month period 10 days into his July vacation. If his vacation to US started July 1, his 12 month calandar can start July 11. Then from July 11, 2007 through July, 10 2008 he has 365 - 35 = 330 days foreign. That gives 173 of 365 days or 47%. I don't believe you are allowed to add days from two 12 month periods to qualify. Possibly he could also qualify in 2007 using Aug 4 2006 through Aug 3 2007. That would give us 365 - 35 = 330 days of which 215 are in 2007, or 59%. Again, under the physical presence rule I don't think I can add the 2 periods together, but must find a 12 consecutive month run that has 330 foreign days in it, and apply the 2007 foreign days from the 12 month window to all of 2007 to establish the allowed ratio.

That is why I really want to know if I can use the bona fide resident method instead. This would give 100% of the exclusion if allowed.

So my question is not so much how to use the physical presence test,

but what do you think about the application of the bona fide resident test using the facts as originally stated?