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I have been over and over Publication 54 and it is absolutely useless. I am trying to investigate what happens in the following situation.

Scenario: An American expat, call him John, has lived overseas for 20 years. He has permanent residency in a foreign country, a foreign wife, 2.3 children, a dog and a hideously expensive mortgage in this foreign country. He hasn't been back to the USA in over a decade. He files his taxes and takes the overseas income exemption based on physical presence.

He is in discussions with an American company to take a full time, permanent position that would split his time equally between a new subsidiary office they are creating in the foreign jurisdiction and the home office in the USA. His family will not be coming to the USA. He will be staying at a serviced apartment paid by the company when he visits the USA.

Due to work permit requirements in the foreign jurisdiction, all salary must be paid to him in the foreign country through the foreign subsidiary. He will receive no income directly from the American parent.

Now, the question:

How does John file his taxes?

It seems obvious he is a bonafide resident of the foreign country. That is where he is paid his salary and where he pays his taxes. He has lived there for 20 years and has no intention of returning to the USA permanently. But could he also a bonafide resident in the USA? Publication 54 implies there are minimum requirements for being overseas for both physical presence and bonafide residence tests. It clearly states the minimum time is 330 days for the physical presence test. But it never states anywhere a threshold days in a foreign country for the bonafide resident test.

Can anyone advise what John's tax situation is? With equal time spent in the foreign country and the USA, does he qualify for the foreign earned income exclusion?

The next question. The tax rate in the foreign jurisdiction is actually higher than the USA, but retirement fund deductions that are recognized in the foreign country but not by the IRS reduce taxes paid overseas to less than what would be paid in the USA sans retirement fund. So if John does not qualify for the foreign earned income exclusion, his overseas taxes paid can not completely offset USA taxes due. In this case, is there anything John can do so he is not unnecessarily penalized for contributing to his overseas retirement account?

Finally, does the company paid serviced apartment he will stay in while in the USA qualify as income or would it simply be a company expense just like a hotel?

There seems to be alot of information on the IRS website of how to apply the rules when an American lives in the US and is sent overseas, but almost nothing about what to do when an American lives overseas and is sent to the USA. Any advice on how to properly file taxes in a situation like this is appreciated.
 

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Ah, yet another of the "joys" of the ambiguities of the US tax code and regulations!

OK, second question first, because it's the easiest. If the employer is providing your accommodation while you are in the US, then it has to be added to your W-2 earnings. If you are paying for your accomodation and being reimbursed by your employer, it may pass as "reimbursed business expenses." You might want to have a look at this IRS tax topic on "business expenses." https://www.irs.gov/taxtopics/tc500/tc511

The first question is the tougher of the two, however. Apparently there is no hard and fast limit to the number of days you can spend in the US if you are claiming "bona fide resident" status - however you still have to apportion your salary based on days in the US vs. days out of the US and pay taxes on the days you worked in the US. Don't know how your home country taxes your salary, but you would definitely want to look into whatever relief there is there for foreign source income - especially if there is an income tax treaty of some sort.

On the retirement plan, you'd have to see if there is any sort of "social security treaty" between the US and your home country. Absent that (and there aren't that many countries that have a social security treaty), you're kind of stuffed.

You could always just try asserting your "bona fide resident" status and see how far it gets you (but you would still have to pay US tax on the days you work in the US, along with any "remuneration in kind" like your accommodation costs).
Cheers,
Bev
 

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Since you are saying things like Bona Fide Resident, I assume that you are looking at the foreign earned income exclusion. Whether you would qualify is likely to boil down to the definition of "abode" - something not actually defined in the tax code.

Your post is rather timely... Phil Hodgen has just posted a blog on this topic which you might like to read...

https://hodgen.com/abode-means-foreign-earned-income-exclusion/

The fact that you maintain a house in that foreign country, your family is not living with you in the states and as long as you aren't entering into a long term rental agreement or purchasing a home within the US, you might very well meet the tests for the foreign earned income exclusion.

I know that you have said that the tax and retirement regime means that FTC is disadvantageous... I have to admit I am perplexed a bit by that... for reasons I will try to explain...

Unless explicitly overwritten by an income tax treat, if your foreign pension/retirement plan is treated an a non-qualified in the US sense, then you couldn't actually exclude it as earned income (Section 911(b)(B)(iii)).

So.. if you were only able to exclude 50% of your income as foreign earned, you would only have 50% of the tax credits to cover that taxes due on both half your income plus the whole of your pension plan payments. Unless there is some strange nuance with non wage income that I don't get, the law of fractions should suggest that you would be better off using the FTC.

So long as you aren't employed directly by the US parent, and you remain a tax resident of the foreign country, then all of your income (even if it was paid into a US bank account) would be eligible for foreign tax credit treatment ... as opposed to only that half earned while working in the foreign country.

As Bev says... you will also need to consider that the fair market value of accommodation provided by your employer is likely to be considered a fringe benefit and thus taxable as compensation.. potentially worsening your tax position.

Take a look at Pub 525. https://www.irs.gov/pub/irs-pdf/p525.pdf

Further to Bev's comment, totalisation agreements are more about into which system you are required to pay. Based on those agreements that I have read, your circumstances would generally have you pay into the foreign scheme.

Of course all the above would look very different if you started being paid by the US parent company - but you have specifically stated that you don't want to do that so as not to jeopardize your residency status.
 

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Slight correction, if you were able to exclude your entire foreign income and your other income including pension payments was under your deductions and exclusions then you could end up with zero tax due as your taxable income would be zero.

However I still hold that you are more likely to be worse off if you could not exclude your entire income.
 

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Pension payments aren't "excludable" - at least not under the FEIE. Who gets to tax them usually falls within the terms of the relevant tax treaty.

And, even as a bona fide resident, it's very likely that you'd be expected to apportion your salary income so that salary for days worked in the US wind up being subject to US income tax, even as the rest of your salary could be excluded with the FEIE.
Cheers,
Bev
 
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