United States taxpayers living overseas are usually somewhat familiar with the benefits of the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction. Often I see many misconceptions with regard to the rules. Here is one of the most common. Not understanding the concept can mean losing the benefits that might otherwise be possible.
In order to qualify for any of the benefits, the taxpayer is required to have (among other things) a “tax home” in a foreign country. In defining what is meant by a “tax home” the law provides that the taxpayer shall not be treated as having a “tax home” in a foreign country “for any period for which his abode is within the United States.” What is the difference between one’s “tax home” and one’s “abode”?
What is a “Tax Home?”
Under the tax rules, one’s tax home” is defined generally as the main place of business, employment, or post of duty, regardless of where the individual maintains his family home. The tax home test focuses on the place of one’s vocation or employment. It 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 main place of business because of the nature of your work, your tax home may be the place where you regularly live. If you do not have either a regular or main place of business or a place where you regularly live, you are considered an “itinerant”. In that case, your tax home is wherever you work.
What is an “Abode”?
As mentioned, you are not considered to have a tax home in a foreign country for any period in which your abode is in the United States. Here is where many people can get tripped up. One’s “abode” is generally defined to mean one’s home, habitation, residence, domicile, or place of dwelling. Unlike the term “tax home”, it does not mean the principal place of business. One’s “abode” has a domestic meaning rather than a vocational one. The location of a taxpayer’s abode often depends on where he maintains his economic, family, and personal ties.
Examples – “Abode” in the United States
Let’s look at some examples of cases in which the taxpayer will not be treated as having a “tax home” in a foreign country because he will be treated as having an “abode” in the US rather than in a foreign country. As a result, the taxpayer will not be able to take the foreign earned income/housing exclusion (or housing deduction).
Example 1: Assume a taxpayer takes on a job in a foreign country, but keeps his home in the US and maintains his family there – perhaps because his wife has a job in the US and the children are in school there. The taxpayer has a long-term employment contract, but he returns home every other month to be with his family and he continues with all of his US club memberships, his church membership and social contacts in the US. The taxpayer does not immerse himself in the lifestyle, culture or social life of the foreign posting.
Example 2: Taxpayer is employed on an offshore oil rig in the territorial waters of a foreign country and works a 28-day on/28-day off schedule. He returns to his family residence in the United States on his off periods.
Facts are Critical
The facts of each case will determine the outcome and advance planning can help you create a better fact pattern supportive of taking the foreign earned income / housing exclusion (or housing deduction). Some facts will prove difficult because they will fall into a very gray area.
Significantly, the tax rules provide that your abode is not necessarily in the United States while you are “temporarily” in the United States (think summer vacation).
The IRS states that your abode is also not necessarily in the United States “merely” because you maintain a dwelling in the United States, “whether or not your spouse or dependents use the dwelling.” If you are in this type of situation you are well advised to do all that you can to show your “abode” is in the foreign country. For example, your calling cards should show your business and home addresses in the foreign country; you should obtain a driver’s license there; join civic and local associations and clubs, places of worship etc., in that country; open bank accounts there and secure consumer credit there. All of these factors may help tip the scale in your favor if challenged by the IRS as to the location of your “tax home”.