This is actually a difficult question to answer, despite the fact that many green card holders give little thought to the issue and willy-nilly claim the exclusion. Let’s look at some background.
Americans working abroad may be eligible to exclude from US taxable income certain foreign earned income (wages, compensation for services) under the rules governing the Foreign Earned Income Exclusion (FEIE). You can learn more about what is meant by “earned income” at my blog post here. This blog post will focus on the ability of a green card holder to utilize the FEIE.
The FEIE amount is adjusted annually for inflation. The amount for 2018 is US$104,100; for 2019 the amount is US$105,900. If a couple is married, each spouse can claim the full FEIE amount (e.g., for 2018, each spouse can exclude up to $104,100 of his or her earned income). If one spouse does not earn enough salary to fully utilize the exemption amount and has “excess” FEIE, this excess cannot be used by the other spouse to exclude amounts beyond his or her own exemption.
The exclusion can apply regardless of whether any foreign tax is paid on the foreign earned income, provided certain tests are met. Generally, for an individual to qualify for the FEIE; (i) a “tax home” (more detail on this concept, later) must be maintained in a foreign country and (ii) either the Bona Fide Foreign Resident (BFR) or Physical Presence Test (PPT) must be met. In defining what is meant by a “tax home” the law provides that the taxpayer shall not be treated as having a “tax home” in a foreign country “for any period for which his abode is within the United States.” What is the difference between one’s “tax home” and one’s “abode”? This is itself, a somewhat complicated question and I have done a separate blog posting on this issue. Access it here.
The FEIE is claimed by filing a tax return that includes a properly completed IRS Form 2555.
The BFR Test
To meet the BFR Test, a person must be a “bona fide resident” of a foreign country for an uninterrupted period which includes a full calendar year. A resident is one who, based on all of the facts and circumstances, has essentially settled in that country. Questions of bona fide residence are determined on a case-by-case basis, taking into account such factors as your intention or the purpose of your trip and the nature and length of your stay abroad. I have written a separate blog post on this topic, here.
To meet the PPT an individual must be a US citizen or a resident alien, who is physically present in a foreign country or countries for 330 days in any 12 consecutive months. The 330 days do not have to be consecutive, but they must be whole days present in a foreign country. Travel time does not count toward the requisite 330 days if the travel is in the US or its possessions for periods of 24 hours or more, or takes place over international waters. Recordkeeping is critical. The PPT often helps an individual on short assignment. It also enables an individual to come back to the US for short periods (generally up to one month) in any consecutive 12-month period and still qualify for the exclusions.
Green Card Holder and FEIE
The question is often asked whether a green card holder can use the FEIE. Yes, a green card holder can claim the benefits of the FEIE, but like anything else remotely related to US tax and US law, the devil is in the details and the decision must be carefully thought through.
First it must be remembered that the green card holder must have a “tax home” in a foreign country. We will further explore “tax home” later in this post. Then he must satisfy either the PPT or BFR Tests.
A green card holder can qualify for the FEIE under the PPT; this is a matter of simply counting 330 days of physical presence in a foreign country or countries, in any consecutive 12 month period.
Bona Fide Residence Test and An Applicable Tax Treaty
A green card holder can also qualify for the FEIE under the BFR Test if the green card holder is a “bona fide resident” of a foreign country or countries for an uninterrupted period that includes an entire tax year, AND the individual is a citizen or national of a country with which the United States has an income tax treaty in effect. In particular, the tax treaty must have a nondiscrimination clause. See Publication 901, U.S. Tax Treaties, for a list of these countries.
A nondiscrimination clause is a fundamental provision in every income tax treaty. Essentially, a nondiscrimination clause seeks to ensure that citizens/nationals and residents of one of the treaty partner jurisdictions are not discriminated against by the other treaty partner jurisdiction. In simple terms, a signatory to the treaty may not discriminate against the citizens / nationals, or residents of the other signatory. Absent a specific treaty provision or a provision of the regulations under the treaty to the contrary, the non-discrimination article in a United States income tax treaty will be applied without regard to the saving clause in the treaty.
See Revenue Ruling 91-58 1991-2 C. B. 340 addressing the issue whether United Kingdom nationals who hold a green card can qualify for the FEIE under the BFR test enunciated in Internal Revenue Code Section 911. The Revenue Ruling stated: “Because citizens of the United States may be treated as qualified individuals for purposes of section 911(d) of the Code under either the bona fide residence test or the physical presence test, requiring nationals of the United Kingdom to satisfy the physical presence test subjects them to a requirement connected with section 911 which is more burdensome than the taxation and connected requirements to which citizens of the United States in the same circumstances are subjected. Accordingly, nationals of the United Kingdom must be treated as qualified individuals for purposes of section 911 if they satisfy the requirements of the bona fide residence test.”
If a green card holder decides to use the BFR, based on a Treaty containing a nondiscrimination clause, he should file Form 8833 treaty return position disclosure.
Immigration and Taxation – Clash of the Titans
Taxpayers holding green cards who are considering use of the FEIE, especially under the BFR test, must carefully consider the immigration law conditions for maintaining the green card and, they must seriously consider whether they wish to retain the card. It is possible the green card can be revoked if a taxpayer claims the “foreign earned income exclusion”, especially if he does so by using the BFR Test. For example, if a taxpayer claims to be a ‘bona fide resident’ of, for example, Greece, this would seem to me as evidencing to the US Citizen and Immigration Services (CIS) to be in direct contradiction to the claim that the individual is a permanent resident of the USA.
Using the PPT may be less risky than claiming one is a BFR of a foreign country, given that it is based on being physically present in a foreign country. This might be even more defensible if the individual had a so-called “re-entry permit”. A green card holder may apply for a re-entry permit before departure from the United States. The issuance of a re-entry permit by the CIS constitutes a determination that you are a lawful permanent resident, you intend to depart the United States temporarily, you intend to return to the United States, and your departure is not contrary to interests of the United States. You may remain abroad for a period of up to 24 months with a valid re-entry permit.
However, it must be remembered that all taxpayers claiming the FEIE, regardless of the test used, must have a “tax home” outside the USA.
Concept of the “Tax Home”
Under the tax rules, one’s tax home” is defined generally as the main place of business, employment, or post of duty, regardless of where the individual maintains his family home. The tax home test focuses on the place of one’s vocation or employment. It 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. If you do not have either a regular or main place of business or a place where you regularly live, you are considered an “itinerant”. In that case, your tax home is wherever you work.
A CIS official might take a harsh look at this issue concerning “tax home”. For example, if the individual had disrupted the continuity of residence by spending more than six months outside of the United States and therefore had the burden of establishing to the satisfaction of the USCIS examiner that continuity hadn’t been disrupted, one would think that claiming a “tax home” outside of the United States is inconsistent with claiming continuous residence within the United States. Very few accountants know about the immigration consequences of filing IRS Form 2555. Taxpayers facing this situation are best advised to check carefully with an immigration specialist before any position is taken on the US tax returns for the FEIE.
Use of the “Foreign Tax Credit” instead of the FEIE may avoid all of the sticky implications mentioned above since the relevant tax form does not ask pointed questions about the taxpayer’s living abroad, but some questions might still arise from CIS when one uses the Foreign Tax Credit (e.g., explain the circumstances of your working overseas). Regardless, in the United Arab Emirates (and other Gulf countries), no income tax is imposed on residents, thereby precluding this possible workaround.
What Should YOU Do?
Every individual’s situation will be different. The facts must be carefully examined in making a determination of what the green card holder might do with regard to claiming the FEIE. It is not a decision to be made lightly or without the benefit of proper advice. Should you wish to consult with me on this matter, please email me to arrange a consultation.
Posted May 2, 2019
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