International Tax Guidance Concerning Foreign Earned Income Exclusion General and Specifically to Airline Crew Members

I. Foreign Earned Income and Exclusion Provision

A U.S. Citizen or a resident alien of the U.S is taxed on all worldwide income. These provisions apply regardless of whether you reside in the U.S. not. Additionally, it applies to Taxpayers that performing services in Foreign or international airspace. 

The IRS has provided guidance and reprieve for qualifying U.S. citizens and resident aliens who live and work abroad. These individuals may be able to exclude from their income all or portions of their foreign earned income. Additionally, one may exclude or deduct certain qualifying foreign housing costs. 


II. How to qualify for foreign earned income exclusion:

    1. One must be a U.S. Citizen or Resident Alien (For Federal Tax Purposes)
    2. Have foreign earned income (Income that is received for working in a foreign country)
    3. Have a tax home in a foreign country, and 
    4. Meet either the bona fide residence test or the physical present test 


III. Bona fide Resident Test VS Physical Presence Test

Bona Fide Resident Test Factors that are taken into consideration to qualify for Foreign Earned Income Exclusion.

 For a Taxpayer to be considered a bona fide resident of a foreign county a determination is made on the facts of the individual taxpayer. The IRS will take into account the taxpayer’s intent or purpose for being in the foreign country, the activities the taxpayer is involved in, whether you paid taxes in the foreign country.

 These factors are just part of what the IRS will consider for you to meet the bona fide residence test as each individual taxpayer has different set of circumstances. Additionally, the IRS requires that you have been a bona fide resident of a foreign country or countries for an uninterrupted period  that includes an entire tax year ( this can be the year before or after the year in which that you have claimed a tax benefit for the time spent abroad). What is considered an entire tax year (January 1 through December 31 for calendar year taxpayers) You may take short trips during the period back to the United States. 


Physical Presence Test

For a Taxpayer to meet the physical presence test, you must be physically present in a foreign country 330 full days during a 12-month period. This includes any day abroad in another foreign country as long as your tax home is in a foreign country. 

 You will not meet the requirements for the physical presence test, if you are not present in a foreign country or countries for 330 full days during the 12-month period for any reason. These reasons could be illness, family issues, a vacation or even orders from your employer. Additionally, if you a present in a foreign country in violation of U.S. law then the time spent in that foreign nation will not meet the physical presence test. 

The requirements may be waived if the foreign country you are residing has matters that arise that are out of your control such as:  war, civil war, unrest or similar conditions that may be adverse for you to continue your residence. 


IV. What Qualifies as a Tax Home?

A tax home is where your regular or principal place of business is conducted (unless you have a U.S. Abode).

It is important to note that even if you are based in a foreign country you may not have a qualifying Tax home for any period during which your abode is in the United States for years beginning after December 31, 2017. 


V. Non-qualifying abode for Tax Home requirement

If your abode is in the United States, you will not meet the test to qualify for the Foreign Earned Income Exclusion.  The location of your abode is based on where you maintain your family, economic, and personal ties. 

Your abode is not necessarily in the United States merely because you maintain a dwelling in the United States or whether your spouse or dependents use the dwelling. Your abode is also not necessarily in the United States while you are temporarily in the United States. However, these factors can contribute to you being considered maintaining your abode in the U.S.


VI. What is considered a Foreign Country?

A foreign country is any territory (including its airspace and territorial waters) under the sovereignty of a government other than the United States. 

For the purposes of the Foreign earned income exclusion and housing exclusion/ deduction the terms foreign and abroad and oversees refer to areas outside the United States, American Samoa, Guam, the Commonwealth of the Northern Mariana Islands, Puerto Rico, the U.S. Virgin Islands, and the Antarctic region. 

Furthermore, the term Foreign Country does not include ships and aircraft traveling in or above international waters. Nor does it include offshore installations which are located outside the territorial waters of any individual nation. 


VII. What is Foreign Earned Income?

Earned income includes wages, salaries, professional fees, and other amounts received as compensation for personal services. The income must be foreign earned in a foreign country, to qualify for the Foreign earned income exclusion. 

The location where the services are performed determines whether the income is foreign, not the location of the employer or place of payment. 


VIII. Information concerning International Flight Crew Members

If you are flight crew member certain rules apply to qualify for the Foreign Earned Income Exclusion

For Flight crew members performing services on international flights will need to apportion between the following:

  1. The income that is earned flying over a foreign nation’s airspace and territorial waters, and 
  2. Any income that is earned other than in a foreign country 

The income that may be excluded under the Foreign Earned income Exclusion provision is the portion of income that is earned for services that have been provided in or over a foreign country


IX. What qualifies as a flight crews earned income?

A flight crew earned income is based in a large part from the time when the aircraft begins to start moving away from the gate of departure (“Block out Time) until the time the aircraft stops at the gate upon arrival (Block in Time). While a flight crew members income is generally computed by employers based on the actual flight or block time, the time spent providing required services such as pre-flight, flight, post flight time, training, and other required services. These must all be taken into account when allocating earned income and the location were this income was earned. 


How this is calculated is using a Time basis’s method.

Which a simple calculation based on the allocated income earned in a foreign country and other.  To be able to provide a correct information to be able to use the Time Basis method, a flight crew member should be keeping accurate record of hours of service. 

Which will provide an accurate calculation to compute your foreign earned income. Moreover, unused vacation time and sick pay is allocated based on the percentage of time services are conducted in a foreign country and what is considered other.  As the burden of keeping detail records may be burdensome, major airlines may provide what is called a “Duty Time Apportionment or Flight Time Apportionment” which provides an average time spent in a foreign nation (including the time at the gate, airspace and territorial waters). 

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