Question

Fred currently earns $9,400 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 $10,400 per month if he accepts the assignment. Assume that the maximum foreign-earned income exclusion for next year is $104,100.

a-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?

a-2. If Fred’s employer also provides him free housing abroad (cost of $20,400), how much of the $20,400 is excludable from Fred’s income?

b. 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?

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.

c-2. If Fred’s employer also provides him free housing abroad (cost of $16,200 next year), how much of the $16,200 is excludable from Fred’s income? Assume that Fred will be abroad for 305 days out of 365 days next year.

Answer 1

a-1 Fred will earned $124,800 ($10,400 per month*12 months) by going abroad. Thereofore his total compensation income is $124800 but he can exclude $102,100 under foreign earned income exclusion. Hence Fred will report gross income of $22700 ($124800 - $102,100) from the salary earned.

a-2 Since Fred meets the requirements for the foreign earned income exclusion, he may also exclude the employer provided housing cost that exceed $16,656 ($104,100*16%) upto a maximum of $14,574 ($104,100*14%).

Thus Fred may exclude $3,664 ($20,400 - $16,656) (the lesser of $3,744 or $14,574).

c-1 Fred will earn 9400*2 18800 during Jan -Feb and $104000 during the remainder of the yr.

Howvever he will not be able to claim a partial exclusion based upon his time abroad ($104100*305/365) -$86988..

Thus fred will report gross income of $122800-$86988 =$35812

C-2 Since Fred is not abroad the entire year, the foreign housing exclusion is also reduced proportionately.

The amount excluded, the costs must exceed $13,918 ($104,100 * 305/365 * 16%),

with a maximum exclusion of $12718 ($104,100 * 305/365 * 14%).