Tax planning insights for foreign work assignments.

• Author: Hansen, Diana

In today's global economy, U.S. employers are sending workers abroad in increasing numbers. These workers commonly are referred to as expatriates or assignees. It is a trend that helps spread technical expertise throughout an organization, while simultaneously inspiring creativity and innovation. With proper planning, the transition abroad can be beneficial to both the employer and the assignee. Without proper planning, it can be a disaster. Though not a complete road map, the following is a basic overview of what one would want to know when advising clients prior to foreign work assignments.

The Basics

An understanding of how expatriates, or expats, are taxed is necessary before one can properly plan for an assignment abroad. In short, U.S. citizens are taxed on their worldwide income by the United States, regardless of their residency or the income's source. This means that a U.S. employee's income could potentially be subject to double taxation, in both foreign and U.S. jurisdictions. It seems a bit unfair, right? Well, fortunately, the U.S. government is not completely heardess. Relief is available in many cases. For foreign earned income, an expat can claim either a Sec. 901 foreign tax credit, an itemized deduction for foreign taxes paid, or a Sec. 911 exclusion.

Foreign Earned Income Exclusion

A U.S. taxpayer may exclude up to $100,800 of foreign earned income in 2015 (adjusted for inflation annually) as well as a housing allowance if he or she maintains a tax home in a foreign country and qualifies via either (1) a bona fide residence test or (2) a foreign physical presence test (Secs. 911(a) and (b)(2)).

* Bona fide residence test: A taxpayer who is a citizen of the United States satisfies this test if the taxpayer establishes to the IRS's satisfaction that he or she was a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year. Temporary visits to the United States or elsewhere for vacation or business do not necessarily prevent a taxpayer from establishing a bona fide foreign residence for a continuous period. The expat only qualifies under this test if the country in which he or she claims bona fide residence requires him or her to pay income taxes (Secs. 911(d)(5)(A) and (B)).

* Foreign physical presence test: A taxpayer that is a citizen or resident of the United States meets this test if he or she is present in one or more foreign countries (not the United States) during at least 330 "full" days in any given 12-month period (Sec. 911(d)(1)). These days need not be consecutive, which allows for potential partial exclusions when assignments begin in the middle of the calendar year. Also, notice that not all time needs to be spent in the country in which the taxpayer is claiming to have a tax home and not all time needs to be spent doing business. Personal and vacation time count. This test does not require...