Meeting the 330-day requirement but not maximizing one's exclusion

[mm77]

I worked in a designated war zone from July 2017 through August 2019. For the purposes of the 2018 tax year, I can technically meet the 330-day requirement for the Physical Presence Test by setting my 12-month period from August 8th, 2018 through August 7th, 2019. The problem with choosing this time frame, as far as TurboTax is concerned, is that I miss out on the Foreign Earned Income Exclusion for the months in 2018 that fall outside of this frame - namely, January through July as well as the first part of August. In effect, I'd only receive a prorated exclusion for most of August through December 2018.

On the one hand, the only way to maximize my Foreign Earned Income Exclusion for the 2018 tax year would be to set my 12-month time period as January 1, 2018 through December 31, 2018, and the issue of a prorated exclusion for 2018 would no longer be relevant. On the other hand, choosing this same time frame means being unable to meet the 330-day requirement (I was only overseas for 302 full days during the January-December 2018 period, with the remaining time being either full days spent in the States or transit days to other countries, which don't count as full 24-hour overseas days).

As I understand it, the 330-day requirement is a hard and fast rule. But I've also read about prorated exclusions for partial years. For the 2017 tax year, my 12-month period was May 29, 2017 through May 28, 2018. The last paragraphs of the following link indicate that overlapping is allowed between two tax years.

https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion-physical-pre...

The process outlined in the above link is the only other alternative I can think of - namely, borrowing from the 2017 tax year and ending in the 2018 tax year (say, from June 2017 to June 2018). But even then, I'm still left with the problem of missing out on the exclusion for the income I made from July through December 2018. Is there no way around this? Am I missing something here?

[DoninGA]

Before addressing the Foreign Earned Income Exclusion -

Was your employer the US Government or an agency of the US Government?

[mm77]

DoninGA,

Good morning. An agency of the U.S. government. Our contractor company is in support of the Armed Forces and grooms its employees to stay out long enough to meet FEIE requirements. Unfortunately, it's been particularly confusing for me come tax filing time.

[DoninGA]

To be clear...You are not under a Personal Service Agreement with a U.S. government agency or instrumentality?

Because if you are then you are not eligible for the Foreign Earned Income Exclusion.

See IRS website - https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion-can-i-claim-...

[mm77]

No, I am not under a Personal Service Agreement with a U.S. government agency or instrumentality.

[DoninGA]

Great...

I will ask one of our FEIE experts to review your post to see if they can give you some assistance.

@pk  Can you help with this FEIE issue?

[pk]

@mm77 , can you give me your actual travel days  for 2017, 2018 and 2019  US to/from foreign country and between foreign country to foreign country.  I am asking this to understand what you are saying --- because qualifying period has generally  a loose relationship  with exclusion amount for the tax year.

[mm77]

@DoninGA, thank you for your clarifying questions and help.

@pk, thank you for your patience and time. You're the first to explicitly point out the loose relationship between qualifying period and exclusion amount. My travel and dwell periods from 2017-2019 are below. Please advise if you have more questions.

3 July 2017 - 25 June 2018: War zone (358 full days overseas)

26-27 June 2018: Travel to United Arab Emirates and States

28 June 2018 - 4 August 2018: States (38 full days stateside)

5-7 August 2018: Travel to United Arab Emirates and war zone

8 August 2018 - 4 October 2018: War zone

5-6 October 2018: Travel to United Arab Emirates and States

7-15 October 2018: States (9 full days stateside)

16-17 October 2018: Travel to Czech Republic

18-19 October 2018: Czech Republic (2 full days overseas)

20 October 2018: Travel to Germany

21 October 2018: Germany (1 full day overseas)

22 October 2018: Travel to Netherlands

23-24 October 2018: Netherlands (2 full days overseas)

25 October 2018: Travel to England

26-28 October 2018: England (3 full days overseas)

29 October 2018: Travel to Ireland

30-31 October 2018: Ireland (2 full days overseas)

1 November 2018: Travel to England

2-3 November 2018: England (2 full days overseas)

4-5 November 2018: Travel to United Arab Emirates and war zone

6 November 2018 - 31 March 2019: War zone (146 full days overseas)

1-2 April 2019: Travel to United Arab Emirates and South Korea

3-7 April 2019: South Korea (5 full days overseas)

8 April 2019: Travel to Japan

9-29 April 2019: Japan (21 full days overseas)

30 April 2019 - 1 May 2019: Travel to United Arab Emirates and war zone

2 May 2019 - 24 August 2019: War zone (115 full days overseas)

25-26 August 2019: Travel United Arab Emirates and States

The 12-month period I chose when I filed for 2017 was 29 May 2017 - 28 May 2018, which allowed me to be well over the 330-day threshold.

For 2018, choosing 8 August 2018 - 7 August 2019 would give me 332 full days overseas. But as you surely suspected, choosing this time frame doesn't maximize my exclusion (it only excludes 40K of my income for that year, to be exact). When would I be able to receive the remainder of the exclusion that falls outside of the 12-month period that I chose (namely, the exclusion for the income made during the months of January through July 2018)?

[pk]

@mm77   I have gone through  your travel details  and it  does not appear  that you  should have difficulty in satisfying  the 330 days   because the only requirement is that you find a  test period of consecutive 12 months  in which  you have  have been present in a foreign country or countries for 330 days.  To exclude income you need to meet the following three conditions:

(a) that the  income is foreign sourced

(b) that you have a foreign tax home

(c) you are qualified individual.

The first is established  by performing work in a foreign country  and being paid by a foreign entity or entities / persons.  This where the restriction on being paid by the US govt or any of its administrative units comes in.  Looking at your travel list I would  recommend that you have documentation to  establish that the income is foreign sourced  (  for many expats , when they work for a large multinational, it is easy  to prove the source because they are paid  through  a  local/foreign   wholely owned subsidiary  established under local laws)

The Second  is established  through meeting the substantial presence or bonafide  resident tests.  Here  again  for at 2018, you need to be sure that your personal abode  ( there can be only one at a time ) can be shown to  be foreign.

The Third is established  by being an US citizen / Resident ( Green Card )

Note  that for substantial presence  you  count all full days  present in a foreign country or countries and not days present in the USA or travelling over international waters. Thus when you travel from Netherlands to Germany  you count all days present either in Netherlands or in Germany.  However, if you  go from England to Bahrain, depending on the  route, you may , or may not ,be able to count both days  depending on whether   you are crossing only landmass or flying over international  waters. 

The form 2555 also asks  when you established the foreign tax home  and here you can always  say the first of the year, if  and only if, your  tax home was foreign for all year but you were state side for  a period on business or pleasure -- thus the foreign income for the  year is based on where work performed and  paid by whom NOT on your tax home.  So for  2018 , if all the  income was foreign, then you report  that as foreign sourced and it is tax home that determines  what portion is eligible for exclusion based on where work performed  and paid by whom.

Does that make sense or do you need  help?

my personal  concern in your case would be how you prove  that the income  is foreign sourced  and if you really had a foreign tax home   because what I see is a lot of travel.  Don't get me wrong on this, please

[mm77]

Good morning, @pk. I appreciate the extensive reply. So, we've established that I can pass the Physical Presence Test. Regarding foreign-sourced income, I'll have to sort this out with the accountant, but in the past I had to deal with the ambiguity surrounding the operational definition of "foreign-sourced income". I've since found some sources delineating the difference between U.S.-sourced income and foreign-sourced income as merely making the money while outside the U.S. and not exclusively being paid by a foreign government. Again, this is something I need to sort out with the accountant. Then again, I do defer to your expertise, and so if you've seen something in the literature to definitely indicate the latter, I'm all ears.

Regarding the tax home, the IRS states that one's "tax home is the general area of your main place of business, employment, or post of duty, 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. Having a 'tax home' in a given location does not necessarily mean that the given location is your residence or domicile for tax purposes."

There is also this caveat: "For tax years beginning after December 31, 2017, you are not considered to have a tax home in a foreign country for any period during which your abode is in the United States unless you are serving in support of the Armed Forces of the United States in a area designated as a combat zone." Our combat zone is on the list. With regard to the travel, unless I misunderstand, the vast majority of my overseas time was spent at my place of business (designated combat zone); I imagined the overseas travel could only have helped contribute to the 330-day total.

I really appreciate your thorough attention to my case. It would be opportunistic to continue badgering you with questions. Your reply has already helped inform what questions I need to ask when I take it up with the accountant. Thank you very much for guiding me. Have a wonderful weekend!