Fred currently earns $12,400 per month. Fred has been offered the chance to tran

Question

Fred currently earns $12,400 per month. Fred has been offered the chance to transfer for three to five years to an overseas affiliate. His employer is willing to pay Fred $14,000 per month if he accepts the assignment. Assume that the maximum foreign earned income exclusion for next year is $100,800.

a.1. How much U.S. gross income will Fred report if he accepts the assignment abroad on January 1 of next year and works overseas for the entire year?
a.2.If Fred’s employer also provides him free housing abroad (cost of $16,650), how much of the $16,650 is excludible from Fred’s income?
b.Suppose that Fred’s employer has only offered Fred a six-month overseas assignment beginning on January 1 of next year. How much U.S. gross income will Fred report next year if he accepts the six-month assignment abroad and returns home on July 1 of next year?
c.1. Suppose that Fred’s employer offers Fred a permanent overseas assignment beginning on March 1 of next year. How much U.S. gross income will Fred report next year if he accepts the permanent assignment abroad? Assume that Fred will be abroad for 305 days out of 365 days next year.
c.2.If Fred’s employer also provides him free housing abroad (cost of $16,200 for next year), how much of the $16,200 is excludible from Fred’s income?

Explanation / Answer

a-1. Income reported -$ 67,200.

a-2 Amount Excluded = $522

Fred will earn $ 168,000 by going abroad, but he can exclude $ 100,800 under the foreign earned income exclusion. Hence, Fred will report gross income of $ 67,200 from the salary earned. Since Fred meets the requirements for the foreign-earned income exclusion, he may also exclude the employer-provided housing costs that exceed $ 16,128(16% × $ 100,800), up to a maximum exclusion of $ 14112(14% × $ 100,800). Thus, Fred may exclude $ 522 (the lesser of (a) ($16,650 housing cost less $ 16128 = $ 522) or (b) $ 14112). Thus, Fred includes $ 16125 ($ 16,650 -$ 522 exclusion) of the employer-provided housing in gross income

b. Total income reported will be $158,400

Fred will earn $ 84,000 during the first half of the year and $ 74,400 during the second half of the year. However, because he is not physically abroad for 330 days during a consecutive 12-month period, Fred will not be able to claim any foreign earned income exclusion. So, he will report $ 158,400 of gross income next year

c-1 Income reported will be =$80,570

c-2 Amount to be excluded will be = $2724

Fred will earn $ 24,800 during January-February and $ 140,000 during the remainder of the year. However, he will be able to claim a partial exclusion of $ 84,230 based upon his time abroad [$100,800 full exclusion *305 / 365 (Days in foreign country / days in year)]. Thus, Fred will report gross income of $80,570 ($ 164,800 - 84230) Note that Fred will be abroad the requisite 330 days during a consecutive 12-month period beginning in March. Since Fred is not abroad the entire year, the foreign housing exclusion is also reduced. To be excluded, the costs must exceed $ 13476 ($ 100,800 * 305 / 365 * 16%), with a maximum exclusion of $11792 ($100800 *305 / 365 * 14%). Thus, Fred may exclude the lesser of (a) $2724 ($16,200 housing cost less 13476 = $ 2724) or (B) $11792. Thus, Fred includes $ 13476 ($ 16,200 - $ 2724) of the employer provided housing in gross income.

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