Question

Fred currently earns $9,000 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 $10,000 per month if he accepts the assignment. Assume that the maximum foreign earned income exclusion for next year is $100,800.

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?

2.	If Fred’s employer also provides him free housing (cost of $18,000), how much of the $18,000 is excludible from Fred's income? 3.

Suppose that Fred's employer has offered Fred only 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?

Answer 1

1) Fred will earn $120,000 from abroad, but he can exclude $100,800 under the foreign earned income exclusion. Hence, Fred will report gross income of $19,200.
2) Since Fred meets the requirements of foreign earned income exclusion, he may also exclude the housing costs provided by employer that exceed $16,128 (16% x $100,800), up to a maximum of $14,112 (14% x $100,800).​ so maximum exemption he can claim will be $ 2,016 ( lower of $14112 or $2016 i.e, $18,000 - $16,128).
3) Fred will earn $60,000 (6 x $10,000) during the first half of the year and $54,000 ( 6 x $9,000) during the second half of the year. However, he is not physically abroad for 330 days during a consecutive 12-month period (and he would not have a foreign tax home), he cannot claim any foreign earned income exclusion. So, he will report $114,000 of gross income next year​