Tax Home Abode Explained
If you are an expat, you’re probably familiar with the benefits of the Foreign Earned Income Exclusion (FEIE) and Foreign Tax Credits (FTC). To qualify for this, you don’t just need to pass either the bona fide residence or physical presence test, but also the IRS tax home test.
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What is a tax home?
According to the IRS, your tax home is the general place of your business and employment, regardless of where you maintain your family home. It is a location where you’re permanently or indefinitely assigned to work as an employee or self-employed individual. The location of your tax home is not necessarily the location of your residence or domicile for tax purposes.
If you don’t have a main place of business, your tax home is likely where you regularly live.
If you don’t have a main place of business nor a place where you regularly live, you’re considered itinerant and your tax home is wherever you work.
What is the tax home test?
The tax home test determines whether you qualify to claim the Foreign Earned Income Exclusion. If you have a tax home or abode in the US, you don’t qualify.
What is an abode?
Your abode is where you maintain your family, economic, and personal ties. Just because you maintain a dwelling in the US, does not mean that your abode is in the US, even if your spouse and dependents use this US dwelling.
Abode has a domestic rather than vocational meaning and is therefore different to a tax home, although they can be in the same location.
Example 1:
You are employed in a foreign country and work 28 days on and 28 days off. During your off period you return to your family residence in the US.
You are considered to have an abode in the US and don’t satisfy the tax home test in the foreign country.
You aren’t able to claim either exclusion or the housing deduction.
Example 2:
You are transferred by your company to work in a foreign country for an indefinite period. You’ve kept ownership of your home in the US, but rent it out, and have moved your family to a home your company has rented for you in the foreign country. Here, you’ve rented cars, opened bank accounts and worked with a local charity (created social and economic ties). Your abode is now in this country for the time you live there, and you satisfy the tax home test for the foreign country.
You should be able to claim the Foreign Earned Income Exclusion.
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Temporary or indefinite assignment
Where your tax home is depends on whether your assignment of employment/business is temporary or indefinite. If it is temporary, you won’t qualify for the Foreign Earned Income Exclusion. If your assignment is for an indefinite period, your tax home is in a foreign country.
What is your tax home abode if you work in a combat zone?
For those working in a designated combat zone in support of the US Armed Forces, the US is not considered your abode for tax years beginning after December 31, 2017. So, if you meet the requirements of the physical presence test, you should be able to exclude your foreign earned income.
If you expect your assignment in a single location to last for 1 year or less, it is temporary. If you expect it to last for more than 1 year, it is indefinite.
Why does the IRS care?
The IRS implements the tax home test in order to prevent any US taxpayers from abusing the Foreign Earned Income Exclusion.
What are the implications?
If you claim the Foreign Earned Income Exclusion and meet the tax home test, bona fide residence test or physical presence test, this is considered tax avoidance.
By claiming this exclusion when you are not eligible, you could face a tax bill with a 20% accuracy-related, late-payment penalty and interest.
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