While Congress offers the foreign earned income exclusion (FEIE form 2555) and the foreign tax credit (FTC form 1116) to lighten the tax burden of American workers abroad, they don’t want it too light!
What Is The Revoked Exclusions Rule?
Each year a foreign worker can choose to between FEIE and FTC to pay the lowest amount of taxes. The revoked exclusion rule is designed to prevent taxpayers abroad from switching each year between FEIE and FTC. Simply put, if you had been using FEIE then switch to using FTC, then you are prohibited from switching back to use FEIE for a period of five years.
Sadly, retail tax software products offer the choice without communicating the consequences for subsequent years. Also since the vast majority of domestic tax preparers never use form 2555, they are unaware also, of the implications of switching between the two. Revoked exclusions are, in my opinion, a senseless complexity designed to deprive foreign workers of flexibility and to entrap them in the complexity of the tax code. But it is the law. How can we protect ourselves? Let’s dissect what it means to revoke exclusion.
We’ve blogged a number of times in the past about the foreign earned income exclusion (“FEIE”), because it is one of the main tax relief measures available to expats filing U.S. tax returns. Expats qualifying for the FEIE may be able to exclude all or part of their foreign salary or wages from their income when filing their return – so its importance can’t be overstated.
The following was prepared by IRS Employees Bethany Barclay, Technical Specialist LB&I Division & Tracy McFee, CPA Technical Specialist LB&I Division regarding Foreign Earned Income Exclusion (FEIE).
Tracy and I met as guest panelists on the hit TV Show Tax Talk Today: Aliens, Immigration, and Taxes—Navigating the Shoals and I’ve grown to truly appreciate her knowledge base and skill set. She is a respectable public servant who I thank for allowing me to share her efforts in this venue.
Not many U.S. expatriates realize that the foreign earned income exclusion is an election and is not automatic. In a recent tax court Nancy McDonald learnt this in a painful way when her exclusion was denied. Nancy McDonald V. Commissioner TC Memo 2015-169.
IRC Section 911(a) provides that a qualified individual may elect to exclude from gross income the foreign earned income of such individual. To qualify for the foreign earned income exclusion (FEIE), the taxpayer must satisfy a three-part test:
1. Taxpayer must be a U.S. citizen who is a bona fide resident of a foreign country for an entire taxable year or physically present in a foreign country during at least 330 days out of a 12-month period, sec. 911(d)(1); Read More
Recently in Rogers case, the DC court affirmed the Tax Court’s decision that a flight attendant who performed some duties in and over the U.S. and international waters could not exclude all of her wages under IRC 911 as foreign earned income.
The taxpayer worked as an international flight attendant based in Hong Kong. She performed in-flight duties and some pre-departure and post-arrival work and was generally paid according to her flight time. She received vacation time and benefits, and could receive guarantee pay for work that she would have performed on flights that were canceled. When she received guarantee pay, she was required to remain in Hong Kong awaiting reassignment to another flight. The airline provided the taxpayer with an apportionment of her estimated duty time between minutes spent in or over foreign Read More
Most of us remember the good old days of the 1990s – a seemingly decisive victory in the First Persian Gulf War, the dot-com bubble that transformed computer geeks into nouveau riche millionaires, and a string of world championships that made the New York Yankees appear seemingly unbeatable. President Bill Clinton did a good job of manning the wheel during most of the decade, although truth be told, almost anyone can sail a ship when the seas are calm and a gentle but steady breeze is filling the sails.
Mr. Clinton did have his shortcomings, most notably his interaction with a certain intern which led to. . . well, we’ll skip all the sordid details. He was certainly not the first President to behave in such a manner, and he will not be the last one, but he was the only one to be caught in such a dramatic fashion. After he appeared before a federal grand jury, Read More