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Congress has provided substantial tax benefits for foreign workers, including missionaries.  This This affects what a missionary might owe in Federal Income Taxes.  It federal income taxes. It does not change Social Security tax obligations of employees working outside the USU.S.  In In 2018, an eligible foreign worker can exclude up to $104,100 of income from income tax.

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What

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income can be excluded?

The foreign earned income exclusion only excludes income earned for work performed in a foreign country. It does not matter where the employer is located, as long as the work is performed in a foreign country. “Foreign earnings” do not include earnings for work done for the mission while inside the United States for duties such as deputation or furlough, before or after the work in the foreign country.

For this exclusion, “foreign earnings” do not include earnings from a bank account or other investments, regardless of the location of the investment. If a pay period covers both time in the United States and time in a foreign country, the pay for that period is allocated based on the number of days in each location.

Tests for

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eligibility

There are two tests for determining whether a worker is outside the U.S. long enough to qualify. A worker in a foreign country only has to qualify under one of the tests. During a foreign stay of four years, for instance, different tests may be applied each year: 

• Physical Presence: The worker was present in the foreign country for 330 full days during a continuous 12-month period.
• Bona Fide Residence: The worker established residence in a foreign country for a period that includes an entire tax year.  After After establishing residency with the Physical physical presence test, that worker then is a "Bona Fide Resident" in future year. 

In most cases, a foreign worker will first establish physical presence during the first year of eligibility of Foreign Earned Income.  After After having established physical presence, foreign workers are then considered "Bona Fide Residents.".    For   For years following, if that worker continues to live and work in a foreign location, the Bona Fide Resident Definition definition applies in most cases.   There are other qualifications for Bona Fide Residence, and a missionary should consult a tax consultant if they will not meet the physical presence test in the first year. 

Once Bona Fide Residence has been established using the Physical Presence physical presence test, a foreign worker continues to use that exclusion while working in their place of residence.  That That worker does not need to continue to meet the physical presence test in subsequent years.

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1. Physically present in the foreign country or countries ‒ . Travel time to and from the foreign country, and any return trips to the U.S., would not be included in foreign physical presence. The time does not have to all be in the same country.
2. For 330 full days ‒ . This does not have to be continuous. A 10-day return trip to the U.S. would not be included in the foreign physical presence , but would not disqualify as long as sufficient time was in the foreign country. A full day is 24 hours, so partial days are not counted.
3. During any 12 months in a row ‒ . This does not all have to be in the same tax year.

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If a missionary wishes to use the Bona Fide Resident test to establish residency, they should consult a tax adviser.  The The intent may be demonstrated by factors that show the missionary has made a longer-term or indefinite commitment, though there are no specific factors which required in every case; interpretation is needed.  Consult Consult the IRS and a tax adviser for further guidance.    

Example: A missionary staff member without a husband or dependents arrives in France on November 1, 2015, planning to stay for four years. She rents an apartment with a one-year renewable lease, obtains a French driver’s license, and files taxes in France as a resident. She takes a two-week vacation annually back to the U.S., but otherwise lives in France until May 30, 2017, when for personal reasons she returns to the U.S. to live. She was a resident of France for all of 2016, and her compensation from November 1, 2015 until May 30, 2017 will qualify for the foreign earned income exclusion.

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A missionary must file the right form to claim the foreign earned income exclusion. Form 2555 (or Form 2555-EZ) is filed with the tax return each year in which the missionary has qualifying foreign income. The information required for the form will demonstrate how the missionary met one of the above requirements, and the amount of income that was not taxed because of the foreign earned income exclusion.   That means that the missionary will report the dates that they worked outside the US and the dates they worked inside the US each year.  The  Physical The Physical Presence requirement only needs to be satisfied the first year of qualifying for foreign earned income. 

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The foreign earned income exclusion does not exempt income from Social Security taxes.  It It only relates to Federal Income Tax.  

If I will qualify for the foreign earned income exclusion

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. How do I avoid having so much withheld from my check?

An international missionary may ask the finance team to change the amount paid each month toward Federal Income Tax.  This This request can be included on the W4 form, or by written instruction.  

If I have to file my tax return before completing my period of physical presence or tax year of residency

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. What do I do?

You have 2 two choices.  You You can either:

• • delay the Delay filing your taxes by utilizing extensions to delay your filing deadline  OR OR 
  • file File on the date , and submit a corrected return later. 

Be aware that, if you are residing or working outside the U.S. on April 15th15, your tax  return return is not due until June 15. 

What if I must return to the United States before qualifying?

The minimum time requirements for bona fide residence and physical presence can be waived if you must leave a foreign country because of war, civil unrest, or similar adverse conditions in that country. If you leave for personal reasons before meeting the requirements while seeking to qualify for the Physical Presence Testphysical presence test, you will not be able to use the foreign earned income exclusion.

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Furlough is a temporary work assignment in the USU.S.  It It does not constitute a change in residence in most circumstances.  ThereforeTherefore, it does not interrupt "Bona Fide Residence" of someone utilizing  the the Foreign Earned Income Exclusion. 

IRS form 2555 will ask how many days you worked in the USU.S., and you will need to report that.  TechnicallyTechnically, earnings for work in the US U.S. are taxable ; however, due to the standard deduction level, a Reliant missionary rarely owes more tax during a furlough. 

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The foreign housing exclusion essentially allows the exclusion of some overseas housing expenses that exceed a calculated threshold from income. The foreign housing exclusion is in addition to the foreign earned income exclusion.  Most Most Reliant missionaries will not use this exclusion simply due to the fact that the base Foreign Earned Income Exclusion is greater already that than most missionary salaries.  When When the Foreign Earned income exclusion matches or exceeds your salary, you do not need to itemize housing separately. 

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• • For 2018, housing costs in excess of $16,656 but less than $31,230 can be excluded in addition to the foreign earned income exclusion.
  • A missionary whose taxable compensation is less than $104,100 already has all of his or her income excluded by the foreign earned income exclusion.
  • A missionary who has taxable compensation of more than $104,100 but housing costs of less than $16,656 does not have sufficient housing costs to claim an additional exclusion for housing cost.
  • A missionary whose housing is excluded by the minister’s housing allowance already excludes housing costs from income. (There is no minimum threshold.)
  • A missionary who is required to reside on the mission’s business premises in order to perform their job (house parent at a mission school, for instance) already has the value of their housing excluded from income.
  • A missionary whose taxable compensation is more than $104,100, who does not qualify for minister’s housing allowance, and whose housing costs exceed $16,656, may claim an additional exclusion for housing (please consult your tax advisor for specifics).

Additional Resources

The following resources are available from the IRS website at www.irs.gov:

• IRS Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad
• Forms 2555 and 2555 EZ, Foreign Earned Income and their instructions
• Form 673, Statement For Claiming Benefits Provided by Section 911 of the Internal Revenue Code

http://www.irs.gov/Individuals/International-Taxpayers/Foreign-Earned-Income-Exclusion

Please do not hesitate to contact the CPA firm of Capin Crouse , if if you have any personal questions about foreign earned income exclusion:
www.capincrouse.com      info@capincrouse.com