Friday, June 21, 2013

Tax Break for Working Abroad on a Yacht Full-Time

US citizens and resident aliens (such as green card holders) living abroad are subject to US tax on all of their worldwide income.  One relatively well-known exception is the foreign earned income exclusion, which allows a qualifying taxpayer to exclude up to $97,600 (in 2013) of earned income from taxable income.

The requirements for earning the $97,600 (adjusted annually for inflation) tax-free are:
1. The income must be earned income, such as wages or commissions, not a pension or other deferred compensation, and not received as an employee of the US government,
2. The person's principal place of business (his "tax home") is in a foreign country, and
3. during any period of 12 consecutive months, the person is present in a foreign country or countries during at least 330 full days in such period (or alternatively is a "bona fide resident" of a foreign country or countries, which is a complicated topic not discussed in this post).
4. The person does not live in a naughty country, which current includes only Cuba (the list was last updated in 2004 to remove Libya and Iraq). 

If a couple is working abroad, both spouses may exclude up to $97,600 of their separate salaries. 

In the landmark 2007 case of Struck v. Commissioner, the Tax Court concluded that yacht employees could claim the foreign earned income exclusion for their yacht-related salaries when the yachts were operating outside the United States.  

Mr. Myron Struck was employed full-time from 1975 to 2002 as a yacht captain for owners of private yachts.  His wife Thelma was employed on the yachts as a chef and stewardess.  They lived on the yachts, which operated primarily in foreign territorial waters, except when they took around two weeks of vacation in the United States each year.

The Tax Court concluded that the Strucks' tax home / principal place of business was on the yacht, since they did not have a regular office or other business location.  Therefore, they satisfied the requirement that their principal place of business be in a foreign country. 

The Tax Court also concluded that the Strucks spent over 330 days each year in foreign countries.  Notably, the Strucks did not have to spend all of the time in one country; they qualified by spending the 330 days in the territorial waters of multiple countries.  While time spent in international waters generally does not count as time spent in a foreign country, a day of travel in international waters from one foreign country to another foreign country is treated as a day in a foreign country.

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