Foreign income exclusion

Forum|Forum|2 years ago
January 31, 2024
1 reply
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I have lived abroad for 7 years and always filed the foreign income exclusion (always through Physical Presence Test). This year my situation was more complicated: I worked all of Jan and Feb 2023 abroad as an employee for a foreign employer, but then I quit that job. I became an independent contractor and went to the US and worked all of Mar and Apr 2023 in the US for a US client. I then traveled back abroad and worked for the same US client, but remotely from my foreign residence from May-Dec 2023. While I don’t qualify for the physical presence test due to my 60 day trip to the US, I technically seem to qualify for the bona fide resident test, EXCEPT for the fact that I didn’t pay foreign taxes for my income earned from the US client May-Dec 2023 even though I was working remotely for them abroad (simply because I had not known if I was required to do so or not). I understand I must definitely pay US income tax on the Mar and Apr work done in the US. However, does this mean that I still owe US income taxes on the May-Dec 2023 work done abroad since I didn’t pay foreign taxes? And if so, even if I pay US income tax on that amount, is it still possible to exclude the Jan and Feb 2023 foreign income I earned through the bonafide residence test (where I did pay foreign taxes through the assistance of my foreign employer)?

Ask the Experts - Early Filers - Jan 2024

DaveF1006

Level 15

According to this IRS source, to qualify under the Bona-Fide Residence Test

You must be a US person (either a resident alien or a US citizen) living in a country that has a tax treaty with the US
You must actively earn foreign income in the country where you’ve taken residence — unearned income, such as dividends, interest, and pension payouts, do not qualify.
You must have a residence in a foreign country.
You must live within that country for an entire tax year – typically January 1 through December 31 of a single year (though brief trips or vacations to the US may be allowed)
You must not have any plans of moving back to the US in the foreseeable future or have an end date for the work you are doing in the foreign country— student visas and temporary work visas do not qualify.

The real question with this is, if your time spent in the US can be considered brief or a vacation? in my opinion, I would say no to this question just to err on the side of caution because you actually came here to work during those two months and the visits weren't brief. In this case though, the word brief may be subjective since the IRS does not define what brief is.

For Jan and Feb, since you paid foreign taxes, you may qualify for a foreign tax credit for the taxes you paid overseas.

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