Form 2555 knowledge needed

[TaxLadyinPA]

Young couple gets opportunity to work for an Uncle in Saudi Arabia at a private firm.

Uncle’s primary business is located in NYC, but has offices in Saudi Arabia. Uncle provides housing in SA for the young couple. I have their Saudi Arabia address, their employer’s Saudi Arabia location address

They are paid in American funds by direct deposit to their American bank account.
Their W-2 shows the address of a payroll company in NYC as the employer.
As they use their Mom’s address as their home, the W-2 shows Mom’s address and was mailed to her in PA.
The W-2 shows NY wages and NY withhold.

My first question is … When looking at the W-2 you would say they were PA residents working in NY. There is nothing showing anything to prove that they are living and working in Saudi Arabia. Are they entitled to a foreign income exclusion knowing only these facts? (There is no question that they are indeed in Saudi Arabia – as I know them personally I know it for a fact)

And then I wonder why they are showing NY withhold making them file a NY-non-resident when they didn’t even work in NY.


After I know this answer I will have more questions that I won’t bore you with if unnecessary. But those questions will pertain to the 330 full days.

Thanks in advance for your wise answers J

[Koss]

Foreign Earned Income

If the taxpayer is actually living and working in Saudi Arabia, and the other applicable criteria are met, then yes, they may well be eligible to exclude the income earned abroad.

Your clients will probably meet the tax home test and the physical presence test, but you'll need to look carefully at those criteria.

From a purely technical and legal standpoint, it is totally irrelevant how their income is reported on Form W-2. The payroll office may be making a mistake by withholding state tax. The mailing address has absolutely no bearing on this question.

I will concede that the reporting documents might initially influence how the IRS evaluates their situation, IF the return is audited or otherwise questioned.

But the question of whether they are eligible to exclude foreign earned income is determined entirely by real-world facts, i.e., where were they living, where were they working, for what period of time, etc.

I live and work in Ohio. Tomorrow morning, I could ask my employer to start mailing my paychecks, and then my W-2 form, to the address of a family member in Florida. My employer would probably comply with the request. But that doesn't magically transform me into a person who is living in Florida while working in Ohio. And this type of request to change a mailing address should not change state withholding.

I know it's not a perfect analogy, but it's the best I can come up with right now.

Someone once said:

It is not the reporting documents that determine the taxation of an item. Rather, it is the nature and character of the income that determine its treatment.

If an accountant gets stoned and reports some dividends on Form 1099-MISC, in Box 3, it doesn't somehow change the dividends into prize winnings or awards. Putting something on paper doesn't make it so.

Or, you can't make a silk purse out of a sow's ear, etc., etc.

[TaxLadyinPA]

2nd question for Form 2555

Thank you very much Koss.

Now for the 330 full days question.

330 full days means consecutive full days ??

If they had their first full day Aug. 18, 2006 and came back home for a vacation on June 24, 2007 that is only 315 days.

They stayed home a month and returned to SA on July 24, 2007 where they are presently today.

They have been there now more than 330 days but not consecutively.

Do they qualify now for the time test?

[Bees Knees]

330 full days requirement does not have to be consecutive. TTB page 14-13 says:

A U.S. citizen or a U.S. resident alien who meets the substantial
presence test, which means the taxpayer is physically
present in a foreign country for at least 330 full days during
a period of 12 consecutive months.

Its the 12 month period that has to be consecutive, not the 330 full days.