Tax home in a foreign country
To qualify for the Foreign Earned Income Exclusion, the Foreign Housing Exclusion, or the Foreign Housing Deduction, expats must have a tax home in a foreign country. The concept of tax home can be tricky and is determined on a case-by-case basis. The IRS is more frequently examining (auditing) taxpayers claiming the foreign earned income exclusion. Therefore, it is always important to talk to an experienced expatriate tax specialist to ensure you apply the concept of a “tax home” correctly. Two terms are explained that all taxpayers need to know are – “tax home” and “abode”
Your tax home is defined as:
· The general area of your main place of business, employment, or post of duty. You do not have to maintain your family home in the same area as your tax 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 main place of business because of the nature of your work, your tax home may be the place where you regularly live.
However, one point that is important for expats to note is 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.
"Abode" has been variously defined as:
· One’s home, habitation, residence, domicile, or place of dwelling. It does not mean your principal place of business. "Abode" has a domestic rather than a job related meaning and does not mean the same as "tax home."
The location of your “abode” can differ from your tax home and often will depend on where you maintain your economic, family, and personal ties. If you maintain an abode in the US, you will be ineligible to have a tax home in a foreign country.
In court decisions that address tax homes, the courts have considered the following determining factors, among others, to conclude if your abode is in the US or a foreign country:
· blocks of time spent in the United States
· maintaining a US bank account
· maintaining a US driver’s licenses
· US voter’s registration within the US
If these facts are present, it can be determined that taxpayers had continued strong familial, economic and personal ties in the United States and only temporary ties in the foreign country where the taxpayers worked. Therefore, the taxpayers were held to have a U.S. abode and the foreign earned income exclusion, foreign housing exclusion and foreign housing deduction were not allowed.
Foreign countries are defined as any territory that is not under control of the United States. It includes that country’s airspace and territorial waters. There are exceptions that pertain to the American Samoa, the North Mariana Islands and Guam. If your tax home is in one of these locations, please contact us for more information.
Temporary or Indefinite Assignment
The location of your tax home often depends on whether your assignment is temporary or indefinite. If you are temporarily absent from your tax home in the United States on business, you may be able to deduct your away from home expenses (for travel, meals, and lodging) but you would not qualify for the foreign earned income exclusion. If your new work assignment is for an indefinite period, your new place of employment becomes your tax home, and you would not be able to deduct any of the related expenses that you have in the general area of this new work assignment. If your new tax home is in a foreign country and you meet the other requirements, your earnings may qualify for the foreign earned income exclusion.
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.
If you expect your employment to last for 1 year or less, but at some later date you expect it to last longer than 1 year, it is temporary (in the absence of facts and circumstances indicating otherwise) until your expectation changes.
For guidance on how to determine your tax home refer to Revenue Ruling 93-86. This ruling may be updated from time to time.