Question

Fred currently earns $9,000 per month. Fred has been offered the chance to transfer for three to five years to an overseas affiliate. His employer is willing to pay Fred $10,000 per month if he accepts the assignment. Assume that the maximum foreign-earned income exclusion for next year is $105,900.

1. How much U.S. gross income will Fred report if he accepts the assignment abroad on January 1 of next year and works overseas for the entire year?

Income Reported:

2. If Fred’s employer also provides him free housing abroad (cost of $20,000), how much of the $20,000 is excludable from Fred’s income?

Amount to be excluded:

2b. Suppose that Fred's employer has offered Fred a six-month overseas assignment beginning on January 1 of next year. How much U.S. gross income will Fred report next year if he accepts the six-month assignment abroad and returns home on July 1 of next year?

Income Reported:

c-1. Suppose that Fred’s employer offers Fred a permanent overseas assignment beginning on March 1 of next year. How much U.S. gross income will Fred report next year if he accepts the permanent assignment abroad? Assume that Fred will be abroad for 305 days out of 365 days next year.

Income Reported:

c-2. If Fred’s employer also provides him free housing abroad (cost of $16,000 next year), how much of the $16,000 is excludable from Fred’s income? Assume that Fred will be abroad for 305 days out of 365 days next year.

Amount to be Excluded:

Answer 1

Part A-1

U.S. gross income reported by Fred = Total salary - foreign-earned income exclusion = (10000*12)-105900 = 120000-105900 = $14100

Part A-2

Housing abroad cost excluded from Fred’s income = $3056

Fred may exclude the employer-provided housing costs that exceed $16944 (16% x $105900), up to a maximum exclusion of $14826 (14% x $99,200). Thus, Fred may exclude $3056 (the lesser of (a) ($20,000 housing cost less $16944 = $3056) or (b) $14826).

Part B-1

U.S. gross income reported by Fred = (10000*6) + (9000*6) = 60000+54000 = $114000

(He would not be eligible for any foreign earned income exclusion as he would not be present in abroad for 330 days during a consecutive 12-month period as well as he would not have a foreign tax home)

Part C-1

U.S. gross income reported by Fred = (9000*2)+(10000*10)-partial foreign-earned income exclusion = 18000+100000-(105900*305/365) = 18000+100000-88492 = $29508

Part C-2

Housing abroad cost excluded from Fred’s income = $1841

Fred may exclude the employer-provided housing costs that exceed $14159 (16% x $105900 x 305/365), up to a maximum exclusion of $12389 (14% x $105900 x 305/365). Thus, Fred may exclude $1841 (the lesser of (a) ($16,000 housing cost less $14159 = $1841) or (b) $12389).