Question

Fred currently earns $9,600 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 $10,600 per month if he accepts the assignment. Assume that the maximum foreign-earned income exclusion for next year is $104,100.

a. If Fred’s employer also provides him free housing abroad (cost of $20,600), how much of the $20,600 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. 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.

d. If Fred’s employer also provides him free housing abroad (cost of $16,300 next year), how much of the $16,300 is excludable from Fred’s income? Assume that Fred will be abroad for 305 days out of 365 days next year.

Answer 1

Ans-a- Fred will earn $127,200 ($10,600*12) by going abroad, but he can exclude $104,100 under the foreign earned income exclusion. Hence, Fred will report gross income of $23,100 ($127,200-$104,100) from the salary earned. Since Fred meets the requirements for the foreign-earned income exclusion, he may also exclude the employer-provided housing costs that exceeds $16,656 (16% of $104,100), up to a maximum exclusion of $14,574 (14%* $104,100). Thus, Fred may exclude $3,944 (the lesser of (a) ($2,600 housing cost less $16,656= $3,944) or (b) $14,574). Thus, Fred Includes $16,656 ($20,600-$3,944 exclusion ) of the employer provided housing in gross income.

b- Fred will earn $63,600 ($10,600*6) during the first half of the year and $57,600 ($9,600*6) during the second half of the year. However, because he is not physically abroad for 330 days during a consecutive 12- month period. Fred will not be able to claim any foreign earned income exclusion. So, he will report $121,200 ($63,600+$57,600) of gross income next year.

c-1-Fred will earn $19,200 ($9,600*2) during January- February and $106,000 ($10,600*10) during the remainder of the year. However, he will be able to claim a partial exclusion of $86,988 based upon his time abroad [$104,100 full exclusion *305/ 365 (days in foreign country/ days in year)]. Thus, Fred will report gross income of $38,212 ($125,200-$86,988).

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 12,178 ($104,100*305/365 *14%). Thus, Fred may exclude the lesser of (a)$2,382 ($16,300 housing cost less $13,918= $2,382) or (b)$12,178. Thus , Fred includes $13,918 ($16,300-$2,382)of the employer provided housing in gross income.