International Tax Gap Series
If you are a U.S. citizen or a resident alien of the U.S., you are taxed on your worldwide income. This applies whether you live inside or outside of the U.S., or whether you are performing services in foreign or international airspace. However, qualifying U.S. citizens and resident aliens who live and work abroad may be able to exclude from their income all or part of their foreign earned income. In addition, they may also qualify to exclude or deduct certain foreign housing costs.
The Foreign Earned Income Exclusion page highlights the general rules for qualifying and claiming the exclusion of foreign earned salary, wages, or other compensation received for personal services. The Foreign Housing Exclusion or Deduction page highlights the general rules associated with claiming the foreign housing cost exclusion or deduction.
This article highlights the foreign earned income exclusion and foreign housing exclusion/deduction rules as they apply to U.S. citizens performing services in foreign and international airspace.
To qualify for the foreign earned income exclusion, you must:
Be a U.S. citizen or resident alien (for federal tax purposes),
Have foreign earned income (income received for working in a foreign country),
Have a tax home in a foreign country, and
Meet either the bona fide residence test or the physical presence test.
If you are a U.S. citizen flight crew member and work on international flights, you may qualify to exclude some or all of your foreign earned income from U.S. income tax, as long as your tax home is in a foreign country throughout your period of bona fide residence or physical presence abroad.
Whether you work as a flight crew member (pilot, engineer, flight attendant) for either a U.S. employer or foreign employer should have no effect on the determination of whether you qualify for the foreign earned income exclusion.
To qualify for the foreign earned income exclusion, your tax home must be in a foreign country. Your tax home is generally located at your regular or principal place of business (unless you have a U.S. abode). If you are a flight crew member, this generally means that your tax home is your base station; the location of the airport from which your flights originate.
However, even if you are based in a foreign country, 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 For tax years beginning after December 31, 2017, 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 you are serving in support of the Armed Forces of the United States in an area designated as a combat zone. See http://www.irs.gov/uac/Combat-Zones.
If your abode is in the United States, you will not meet the tax home test and cannot claim 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, 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.
A U.S. citizen flight crew member based at an airport in Chicago, but residing in Mexico, will be determined to have a tax home in Chicago (regular or principle place of business). Thus, the U.S. citizen flight crew member will not be entitled to claim the foreign earned income exclusion. Alternatively, if the crew member is based at an airport in Mexico, but maintains his abode in the U.S., the individual still cannot claim the foreign earned income exclusion because the individual has an abode in the U.S.
A foreign country is any territory (including its airspace and territorial waters) under the sovereignty of a government other than the United States. For purposes of the foreign earned income exclusion and the foreign housing exclusion/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 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.
Foreign Earned Income
Earned income is wages, salaries, professional fees, and other amounts received as compensation for personal services. To qualify for the foreign earned income exclusion, the income must be earned in a foreign country. The place where the services are performed determines whether the income is foreign, not the location of the employer or place of payment. For example, if you are a U.S. citizen flight crew member, living and working abroad, receiving wages for services performed in China, those wages qualify as foreign earned income even if you are working for a U.S. airline who deposits your paycheck in a U.S. bank account.
As mentioned above, the term “foreign country” includes its airspace and territorial waters, but does not include airspace over international waters, the United States, U.S. territories, or Antarctica. As a result, income earned for performing services as a flight crew member may need to be apportioned to the actual time spent performing services in a foreign country in order to properly determine the amount of foreign earned income.
If you are a flight crew member performing services on international flights, your earned income will need to be apportioned between the:
Income earned in a foreign country (or countries), including the country’s airspace and territorial waters, and
Income earned in other than a foreign country.
Only the portion of income earned for services provided in or over a foreign country is eligible for the foreign earned income exclusion.
A U.S. citizen flight crew member based at an airport in France mostly works roundtrip flights from France to the United States. When working these roundtrip flights, the aircraft flight path generally crosses France, Spain, and Portugal before crossing international waters and entering U.S. airspace. Income earned for providing services in France prior to departure and while flying in French, Spanish and Portuguese airspace is foreign earned income. Income earned for services provided while the aircraft is flying over international waters, in U.S. airspace, and on the ground in the United States is not foreign earned income.
Computing the Amount of Foreign Earned Income
A flight crew member’s earned income is based, in large part, on the services performed from the time the aircraft starts moving away from the gate for departure (“block out” time) until the time the aircraft stops at the gate upon arrival (“block in” time). While the crew member’s earned income is generally computed by the airline based on the actual flight or block time, all of the time spent providing required services (pre-flight, flight, post flight time, training, and other required services) must be taken into account when allocating earned income to the location where they were earned.
Time basis is the method for allocating earned income between “foreign” and “other”. Thus, if you are a flight crew member on international flights, you should be keeping as accurate a record of your hours of service as is possible. In order to compute the amount of your foreign earned income, you will need to compare your time for services performed in and over foreign countries (including their airspace and territorial waters) to your total time spent performing services during the taxable year. This comparison can be expressed by a fraction:
Total time worked in and over foreign countries
--------------------------------------------------------------- x Total wages earned
Total time worked
The result is the amount of your foreign earned income (income earned in and over foreign countries, including their airspace and territorial waters).
Vacation pay and sick pay are included as total wages earned. Thus, vacation pay and sick pay are allocated between “foreign” and “other” based upon the actual time spent performing services in foreign countries and in other places. However, used vacation time and sick time do not go into the numerator or denominator of the fraction outlined above.
Because flight time between two cities may vary based on the actual flight route, location of the jet stream, weather, and other factors, the most accurate way to determine the time spent in and over foreign countries is by using detailed records (flight plans) for each flight reflecting the flight’s planned route and the planned flight time. The flight plan includes a lot of information about the flight, including the route designated by its latitude and longitude readings as well as the estimated flight time between those points. The flight plan will also show the total estimated flight time from the flight’s block out to its block in. As a result, it is possible to plot the geographical points and determine the actual planned time spent flying over foreign countries.
Some crew members, however, may have difficulty securing and reading actual flight plans. Also, this process can be burdensome for crew members who fly a large number of international flights during the taxable year. As a result, airlines are providing crew members a breakdown reflecting the “average” flight time components of flight segments in and over foreign countries (sometimes called “Duty Time Apportionment” or “Flight Time Apportionment”). Per a Tax Court case, Rogers v. Commissioner (T.C. Memo 2009-111), these apportionments, if reasonable, are acceptable as a means to determine the amount of foreign earned income.
References and Links
The International Tax Gap Series