To qualify for the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, your tax home must be in a foreign country throughout your period of bona fide residence or physical presence abroad.
To meet the bona fide residence test or the physical presence test, you must live in or be present in a foreign country for the required time period. A foreign country usually is any territory (including the air space and territorial waters) under the sovereignty of a government other than that of the United States. For purposes of the foreign earned income exclusion, “territorial waters” are those waters that are within 12 nautical miles of the foreign country. The term "foreign country" includes the seabed and subsoil of those submarine areas adjacent to the territorial waters of a foreign country and over which the foreign country has exclusive rights under international law to explore and exploit the natural resources.
The term "foreign country" does not include U.S. territories such as Puerto Rico, Guam, the Commonwealth of the Northern Mariana Islands, the U.S. Virgin Islands, or American Samoa. For purposes of the foreign earned income exclusion, the foreign housing exclusion, and the foreign housing deduction, the terms "foreign," "abroad," and "overseas" 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. The term "foreign country" does not include international waters or airspace, nor does it include offshore installations that are located outside the territorial waters of any foreign country.
Your tax home is the general area of your main place of business, employment, or post of duty, regardless of where you maintain your family home. Your tax home is the place where you are permanently or indefinitely engaged to work as an employee or self-employed individual. Having a "tax home" in a given location does not necessarily mean that the given location is your residence or domicile for tax purposes.
If you do not have a regular or main place of business because of the nature of your work, your tax home may be the place where you regularly live. If you have neither a regular or main place of business nor a place where you regularly live, you are considered an itinerant and your tax home is wherever you work.
You are not considered to have a tax home in a foreign country for any period during which your abode is in the United States unless, for tax years beginning after December 31, 2017, you are serving in support of the Armed Forces of the United States in an area designated as a combat zone.
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, whether or not 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 having an abode in the United States.
"Abode" has been variously defined as one's home, habitation, residence, domicile, or place of dwelling. It does not mean your principal place of business. "Abode" has a domestic rather than a vocational meaning and does not mean the same as "tax home." The location of your abode often will depend on where you maintain your economic, family, and personal ties.
You are employed on an offshore oil rig in the territorial waters of a foreign country and work a 28-day on/28-day off schedule. You return to your family residence in the United States during your off periods. You are considered to have an abode in the United States and do not satisfy the tax home test in the foreign country. You cannot claim either of the exclusions or the housing deduction.
Your employer transferred you to a foreign country for an indefinite period. You kept ownership of your home in the United States but rented it to another family. You placed your car in storage. In November of last year, you moved your spouse, children, furniture, and family pets to a home your employer rented for you in London.
Shortly after moving, you leased a car, and you and your spouse got driving licenses in the foreign country. Your entire family got library cards for the local public library. You and your spouse opened bank accounts with a bank in the foreign country. You joined a local business league, and both you and your spouse became active in the neighborhood civic association and worked with a local charity. Your abode is in the foreign country for the time you live there, and you satisfy the tax home test in the foreign country.
Temporary or Indefinite Assignment
The location of your tax home often depends on whether your assignment is temporary or indefinite. If you are temporarily absent from your tax home in the United States on business, you do not qualify for the foreign earned income exclusion. If your foreign work assignment is for an indefinite period and your abode is not in the United States, your tax home is in a foreign country.
If you expect your employment away from home in a single location to last, and it does last, for 1 year or less, it is temporary unless facts and circumstances indicate otherwise. If you expect it to last for more than 1 year, it is indefinite.
If you expect your employment to last for 1 year or less, but at some later date you expect it to last longer than 1 year, it is temporary (in the absence of facts and circumstances indicating otherwise) until your expectation changes.