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New Law on Foreign Earned Income Exclusion (FEIE)

The IRS recently announced (August 24th) a new law that allows US citizens and resident aliens, notably contractors or employees supporting the US Armed Forces in designated combat zones, to qualify for the Foreign Earned Income Exclusion (FEIE).  In February of this year, the Bipartisan Budget Act of 2018, changed the tax home requirement for eligible taxpayers, allowing them to claim the FEIE even if their “abode, or home, is in the United States.

Prior to the passage of this law, these employees, contractors, etc. who maintained an “abode” in the United States, were unable to claim the FEIE.  The justification being that their home is in the US and not in a foreign jurisdiction given the temporary, contract or short-term nature of their employment. Although abode is not defined in the IRS code or regulations, it has been defined by various courts as one’s home, habitation, residence, domicile or place of dwelling.

Most long-term US citizens living and working overseas qualify for the FEIE as they meet the bona-fide residency test and therefore the first $103,900 (2018 exclusion cap) of income earned in the foreign jurisdiction is excluded from US taxation.

ACA is pleased that Congress understands that there are certain US citizens working overseas that, for a variety of reasons, may continue to maintain a US home or abode.  These individuals will now, rightfully, be able to use FEIE to avoid double taxation of income.  However, there is no reason that this understanding of “abode” should apply only to those US citizens and resident aliens working to support the US Armed Forces in designated combat zones.

There are a plethora of reason for which a US citizen who is not supporting the US Armed Forces may continue to maintain an abode in the United States while actually working overseas.

As businesses and commerce have gone global, the ease with which individuals can “pick up and go” to take advantage of employment and financial opportunities has increased. Employees are now more mobile than ever. Some employees may not be able, or may not want, to relocate their home or family during their employment for a number of reasons; safety issues in the country of employment, family member health/disability issues, schooling and educational issues, special needs children, eldercare management, etc. 

These reasons and others may require that an employee keep an “abode” or home in the United States to manage their personal and family needs while they are working overseas and paying taxes in a foreign jurisdiction.  Forcing a strict adherence to the concept of “abode” puts these individuals at a disadvantage and limits their employment options.

The abode concept is outdated and no longer fits with the way that individuals live and work in the 21st century. The real answer to the complications of tax policy affecting US citizens working overseas is adoption of Residency-based taxation (RBT).  ACA has been on the forefront of RBT advocacy efforts in Washington DC, with the Congress and the tax writing committees.  ACA was the first organization to develop a platform or what is often called a “vanilla approach” for how RBT can be implemented and, to have this approach scored for revenue neutrality, see: 

https://www.americansabroad.org/media/files/files/dc1e1c4e/DEG_short_memo_on_RBT_proposal_11.06.2017.pdf

https://www.americansabroad.org/media/files/page/60567bc4/residency-based-taxation-aca-side-by-side-comparison-current-law-and-vanilla-approach-180420-1600.pdf

It is time for the US Congress to come into the 21st Century not only on the issue of “abode” but also on general tax policy affecting Americans overseas.