Claiming Foreign Earned Income Exclusion and not choosing earlier residency termination date for tax benefits

Question

Hi,  I would be grateful if any of you expert please help me with my tax situation for 2022.  I am Indian citizen. I moved out of U.S on 10th Sept 2022, and then joined a job in India in Sept. 2022. Now, since, I have been staying in U.S from January 1st to Sept. 10th in 2022 and also 2020-2021 (I was on J1 visa), I pass the substantial presence test, and therefore I am resident alien for tax purpose. As per the information in Publication 519, it seems that I can qualify for a residency termination on Sept. 10th, 2022. However, based on my understanding, this is not mandatory to terminate residency on  Sept. 10th, 2022, and I am not providing statement required to terminate residency (on Sept 10th) with my  2022 U.S tax return. I can see more tax benefits by not doing so and claiming as resident alien for the entire year.  In my situation as given below it seems that I am qualified for foreign earned income exclusion (FEIE). The reason is I am residing in India from 10th Sept 2022 to until now. Therefore, I qualify in physical presence test for  FEIE on Sept 9th 2023. My main place of business since  10th Sept 2022 is India and before it was U.S. Also, my tax home since  10th Sept 2022 is India and I do not have a residency in U.S.  I have three question:1. Is my understanding that  terminating residency alien status on  Sept. 10th, 2022 as optional is correct?2. Can I claim FEIE? My doubt for this is because my residence alien status in U.S by default ended in Dec. 31st 2022 and therefore I am not resident alien in 2023, although I am considering days from 2023 to meet the physical presence test for FEIE.3. Is this more appropriate in my case to claim foreign tax credit instead of FEIE? I would prefer to take FEIE if that is not causing any tax complication.

pk12_2 · Accepted Answer

@pk12_2 Please do not worry about the private message. Mainly I want to know if I can claim foreign earned income exclusion for the year 2022 based on physical presence test (or is it more appropriate to claim foreign tax credit). Please see the first post in this thread I mentioned my situation.

In short--- I moved out of U.S on 10th Sept 2022, and then living in India with job since then. Not claiming early termination of residency, and therefore resident alien for the entire tax year 2022. My main place of business since 10th Sept 2022 is India and before it was U.S. Also, my tax home since 10th Sept 2022 is India and I do not have a residency in U.S. It seems to me that I can claim foreign earned income exclusion for the year 2022 based on physical presence test. Please let me know your analysis on this. Many thanks.

@sabya33 ,

(a) to be able to claim Foreign Earned income exclusion, you need to meet the following:

1. Foreign tax home ;

2. Tax payer must be US person ( citizen/ GreenCard/ Resident for Tax purposes )

2. Pass the Physical Presence test ( 330 days abroad in any consecutive 12 month test period ) where the current tax year or part thereof must either ends or starts.

3. The tax filing cannot be done till after the physical presence test has be satisfied..

The requirements are the same for a taxpayer whom is approved to use the Bonafide Resident test -- no 330 out of 365/366 days abroad test requirement.

Section 911 of Internal Revenue code allows exclusion only for qualified individual whom is defined as follows :

(1)Qualified individualThe term “qualified individual” means an individual whose tax home is in a foreign country and who is—

(A)

a citizen of the United States and establishes to the satisfaction of the Secretary that he has been a bona fide resident of a foreign country or countries for an uninterrupted period which includes an entire taxable year, or

(B)

a citizen or resident of the United States and who, during any period of 12 consecutive months, is present in a foreign country or countries during at least 330 full days in such period.

My interpretation of this is that your qualified person (citizen/resident status ) & foreign tax home status both must satisfied during the 12 month test period. In your case you are trying to exclude the October- December of 2022 where in you could be a resident ( may be ) for those three months but your 12 month test period would have to be Sep/October through the next 12 months ( when you are not a resident for most of the period. This because your J-1 visa is generally assumed to be terminated either because of lapse of residency in the USA and/or non-employment by the original sponsor for your visa. I say this because J visa is always associated with employment / training by an institution.

Bottom line is I do not believe you can sustain a challenge by the IRS for exclusion of your earnings post your departure from the USA.

It is simpler to file 2022 as a dual status ( thus excluding your Indian earnings from US taxes ) but of course this means that you have to use itemized deduction and not standard deduction.

The other issue here is that you will have a hard time showing closer connection to the USA in order to prove that you were still a resident ( banking, housing, significant assets , family connections etc etc. )

Beyond this I don't know how to help you .

pk