In today’s age of “digital nomads,” working remotely overseas has become increasingly popular. More companies are adding remote working options in order to benefit from a broader talent pool and give employees more lifestyle choices.
New programs, such as Remote Year, have further facilitated overseas commuting by organizing year-long trips for employees and freelancers to live in multiple cities abroad. Participants, for example, travel in groups to live in multiple cities throughout Europe, Asia and South America, for one month each over a year period.
Working abroad in this fashion presents a number of unique U.S. income tax issues and opportunities for U.S. individuals. Of particular importance is the issue of whether they qualify for the Foreign Earned Income Exclusion (“FEIE”), which allows U.S. citizens living abroad to exclude their foreign earned income from U.S. federal taxation.
Basics of the Foreign Earned Income Exclusion
Provided that an individual can satisfy either the bona fide residence test (substantive change in residence based on facts and circumstances) or the physical presence test (present in a foreign country for 330 full days during any period of 12 consecutive months) and is able to establish a tax home in a foreign country, such individual can exclude from income a portion of his or her foreign earned income.
Foreign earned income is generally pay for personal services performed overseas, such as wages, salaries, or professional fees. It does not include passive income items, such as dividends, royalties, rent, pensions, and capital gains.
The foreign earned income exclusion amount is adjusted annually for inflation. For tax year 2016, the maximum foreign earned income exclusion is up to $101,300 per qualifying person. If filing individuals are married and both work abroad and meet either the bona fide residence test or physical presence test, each one can choose the foreign earned income exclusion. Together, they can exclude as much as $202,600 for the 2016 tax year.
What is a Tax Home?
In order for an individual to qualify for the FEIE, his or her “tax home” must be in a foreign country. The general rule is that a “tax home” is located in the vicinity of the taxpayer’s regular or principal (if more than one regular) place of business or employment, regardless of where you maintain your family home.
Your tax home is the place where you are “permanently” or “indefinitely” engaged to work as an employee or self-employed individual. If you do not have a regular or principal place of business because of the nature of your work, your tax home may be the place where you regularly live. If you have neither (no regular place of business or living), then you are considered an “itinerant” and your tax home is wherever you work.
If you have a permanent place of employment in the U.S. but then are put on assignment abroad, the location of your tax home depends greatly on whether your assignment is temporary (precluding the FEIE) or indefinite (allowing the FEIE). If you expect your employment away from home in a single location to last, and it does last, for 1 year or less, it is temporary unless facts and circumstances indicate otherwise. If you expect it to last for more than 1 year, it is indefinite. Courts generally consider employees not to be on assignment, however, if they choose to move and work remotely from abroad simply for personal reasons, i.e., if the employer does not require the taxpayer to live and work remotely abroad nor benefit from such an arrangement. In such case, the taxpayer’s pre-move place of business can be considered his or her tax home, regardless of the length of stay abroad.
The “tax home” rule is subject to an important overriding exception – an individual is not considered to have a tax home in a foreign country for any period during which the individual’s “abode” is in the United States. “Abode” has been variously defined as one’s home, habitation, residence, domicile, or place of dwelling. Thus, in contrast to “tax home,” “abode” has a domestic rather than vocational meaning. The location of your abode often will depend on where you maintain your economic, family, and personal ties.
Tax Home, Abode, and the Digital Nomad
In the case of the digital nomad working abroad, assuming the individual satisfies the bona fide residence test or physical presence test (often the latter test is satisfied so an inquiry into the former is not necessary), the critical tax issues with respect to qualification for the FEIE then become the “tax home” and “no abode in the U.S.” requirements.
With respect to “tax home,” it may be difficult to establish that the individual has established a home in any particular foreign country if, for instance, he or she works in multiple countries during a single year abroad. The claim of a tax home abroad could be strengthened if the taxpayer stayed in a single location for more than a year on a work assignment, if it were shown that the move were employer-motivated and not solely for personal reasons. Alternatively, taxpayers who are permanently on the move throughout their career may be able to argue that they are “itinerant” workers whose tax home follows them to wherever they work. This may be particularly apt in the case of a freelancer, as opposed to an employee who works at a specific location in the U.S. both prior to and subsequent to spending a year working abroad.
With respect to “no abode in the U.S.”, an individual’s claim will be strengthened if they can show that they have weakened their economic, family, and personal ties to the United States and strengthened such ties abroad. This may prove challenging for those spending just a year working abroad before returning the United States. The strength of the position will depend on the particular facts and circumstances. In this regard, every case is unique and should be analyzed as such.
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