International pilots and international cruise ship employees earn income like salary and wages while working abroad. Most of them assume that they are eligible to claim the foreign income exclusion in the amount of $101,300 in 2016 and $100,800 in 2015 on the US expatriate tax returns. The fact is that several things must be considered to determine the amount of foreign income that can be excluded under the foreign income exclusion.
This is the latest email from one of our clients. “My brother and I are airline pilots. We filed our US expatriate tax returns in the past. However, we got a letter from the IRS stating that we are subject to the audit. The IRS asked us to provide the details of our flights. We claimed foreign earned income exclusion on US tax returns. Why does the IRS ask for this information?” Let’s review the key issues that international pilots and international cruise ship employees must remember.
What are criteria for claiming the Foreign Earned Income Exclusion?
We earlier reviewed in details the foreign income exclusion. Per IRC section 911, the following requirement must be met to qualify for FEIE:
- US citizen or resident alien (green card holder)
- Tax home in a foreign country
- Bona fide residence or Physical presence test
- Foreign income earned while performing services in a foreign country
Let’s discuss the last requirement in more details that affects international pilots and international cruise ship employees.
What is a foreign country?
Per the IRC section 911, the “foreign country” is any territory that is under the sovereignty of a foreign government. The foreign country also includes the territorial waters of the foreign country per the laws of the U.S. and the air space over the foreign country. The seabed and subsoil of those submarine areas are also considered the foreign country as long as they are adjacent to the territorial waters of the foreign country and the foreign country has exclusive rights over these areas with respect to the exploration and exploitation of natural resources. (Reg. § 1.911-2(h))
Which expat tax issues do international pilots and international cruise ship employees face?
Due to the nature of their jobs, American expats working as international pilots and cruise ship employees earn income while in international waters or international airspace. Per several Tax Court rulings, wages earned while in international airspace/waters are not considered to be earned in a foreign country. Consequently, these wages are not eligible to be claimed under the foreign income exclusion.
American expats working as international pilots or international cruise ship employees must determine a percentage of time spent within or over foreign countries. Many large air carries provide a duty time apportionment for flights that helps to allocate the minutes of flight times within or over the U.S., international waters, and foreign countries.
International pilots and international cruise ship employees are advised to consult an expat tax CPA that can assist with FEIE, foreign housing exclusion, foreign tax credit, FBARs, FATCA and other complex tax issues. International tax experts at Artio Partners are here to help you.