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Understanding the Tax Home Test for Foreign Earned Income Exclusion

To qualify for the foreign earned income exclusion under IRC Section 911, it is crucial to meet the Tax Home Test, which is detailed on page 1, Part I of Form 2555, Foreign Earned Income.

Criteria for the Tax Home Test:

To satisfy the Tax Home Test's requirementsunder IRC Section 911, you must maintain a 'tax home' in a foreign country, distinct from the United States, for a consistent 12-month fiscal period.

Definition of a Tax Home:

Main Place of Business: Your tax home is the primary location of your business, employment, or post of duty, where you are permanently or indefinitely engaged for work as an employee or self-employed individual, generally beyond a single fiscal year.
Regular Residence: If your work lacks a regular or main place of business, your tax home is where you regularly reside.
Itinerant Workers: For those without a regular business location or residence, your tax home is wherever you work.

While "tax home," "residence," and "domicile" may have distinct meanings for tax purposes, they are linked by the concept of abode. Having a U.S. abode could disqualify you from meeting the Tax Home Test. However, being temporarily in the U.S. or maintaining a dwelling there—occupied by family members—does not necessarily establish a U.S. abode, allowing you to continue meeting the test's requirements.

Abode Considerations:

You do not qualify for a tax home in a foreign country if your abode is in the United States. Here, an abode refers to a home, residence, domicile, or dwelling.

Relevant Legal Interpretations:

The IRS has determined that work patterns involving "alternating blocks of time" or scheduled rotations in the U.S. are considered a U.S. abode, thereby failing to meet the Tax Home Test.

Definition of a Foreign Country:

For the Foreign Earned Income Exclusion per IRC Section 911, a 'foreign country' refers to any territory under the authority of a government other than that of the U.S.

The definition excludes ships or aircraft operating in or above international waters, as well as offshore installations beyond any specific nation's territorial waters. Nevertheless, a 'foreign country' encompasses the nation's airspace, territorial waters, seabed, and subsoil adjacent to its territorial waters, where it holds exclusive rights under international law for resource exploration and exploitation.

Notably, the term 'foreign country' does not include Antarctica, U.S. territories such as Puerto Rico, Guam, the U.S. Virgin Islands, the Commonwealth of the Northern Mariana Islands, and the Johnston Island.

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