A great number of world travelers utilize the Foreign Earned Income Exclusion to keep up to $102,100 in income out of the paws of the IRS (2017 tax year.)
For those who aren’t bonafide residents of another (non-US) country, this requires passing the Physical Presence Test (PPT) by being in a foreign country or countries for at least 330 days.
2017 is the first year we tried to pass the PPT, and getting it wrong by even one day could cost $20k or more in tax. Needless to say I wanted to get it right.
Physical Presence Test
As with most things in the Internal Revenue Code, what could be simple and elegant is… not. The IRS even uses the phrase “physical presence test” in the definition of the Physical Presence Test. Nice!
Here is the definition and nuances from Publication 54: (emphasis throughout is mine)
To pass the physical presence test requires being physically present in a foreign country or countries 330 full days during a period of 12 consecutive months. The 330 qualifying days do not have to be consecutive.
Full day. A full day is a period of 24 consecutive hours, beginning at midnight.
Travel. When you leave the United States to go directly to a foreign country or when you return directly to the United States from a foreign country, the time you spend on or over international waters doesn’t count toward the 330-day total.
Passing over foreign country. If, in traveling from the United States to a foreign country, you pass over a foreign country before midnight of the day you leave, the first day you can count toward the 330-day total is the day following the day you leave the United States.
Change of location. You can move about from one place to another in a foreign country or to another foreign country without losing full days. If any part of your travel is not within any foreign country and takes less than 24 hours, you are considered to be in a foreign country during that part of travel.
In United States while in transit. If you are in transit between two points outside the United States and are physically present in the United States for less than 24 hours, you aren’t treated as present in the United States during the transit. You are treated as traveling over areas not within any foreign country.
I tried sorting through this using our own travel.
GCC 2017 Travel
We used the calendar year for our period of 12 consecutive months, since it conveniently aligns with the tax year.
We were physically present in Taiwan to start 2017 and flew from Taipei to Paris on April 10th, via Hong Kong. (With miles, of course.) We were traveling from one foreign country to another, and total travel time was less than 24 hours, so we were considered to be in a foreign country throughout the trip. Our first full day in France is April 11th (starting at midnight on April 10th.)
For the next 4 months we bounced around Europe, spending 90 days in the Schengen region before moving on to Croatia, Bosnia & Herzegovina, and Montenegro. All border crossings were within a foreign country, aka valid transfer days.
On August 9th we flew from Dubrovnik to NYC, via London. Sadly, I had to pay for this flight. Again, travel time was less than 24 hours, but this time we were flying to the US so time over International Waters doesn’t count. Even though we arrived at 8 pm, August 9th counts as a day in the United States / NOT in a foreign country.
A month later on September 10th we left the United States for Japan, flying from SFO to Haneda. (Total cost: $5.60 per person.)
The entire flight was over International Waters, so we didn’t benefit from flying over another country before midnight. Even though we arrived in the afternoon on September 11th, our first full day in Japan was September 12th.
Adding up the days, we were physically present in foreign countries for exactly 330 days. Good thing our flight wasn’t delayed…
In the process of trying to figure this all out, I discovered my new favorite web tool, FEIE calc. It makes cool primary color calendars of your travels and calculates PPT days.
A Minor Freak Out on The High Seas
Whilst crunching the numbers on the PPT I spent a few hours convinced we failed the test and were doomed to pay a ton of taxes this year.
See, we went on a 10-day cruise to Alaska. Last I checked Alaska is in the United States, but cruise ships like to spend time in International Waters so they can get casino revenue. After much googling, it turns out International Waters start just 12 miles offshore.
Transit time from SF to Ketchikan, Alaska is 2.5 days (over 24 hours) so we were effectively not in the US and not in a foreign country for a few days. “Oh no! We lost PPT days!”
Fortunately we had already reached our 330 days based solely on the inbound / outbound dates to the US.
Had this cruise been traveling between 2 foreign countries, however…
Had I royally screwed the pooch, we could choose to segment the year as highlighted in this post on how nomads can avoid ACA penalties. This would just limit options if we chose to visit the US over the coming 12 months.
Notes to Self
Since I’ll be working to pass the PPT again in the future, here are the things I want to remember for 2018 and beyond.
- Westbound trans-Pacific flights lose 2 days from West coast.
- Departures to Asia from Minneapolis (near family) cross the Canada border, saving a day (I assume)
- The flight from SF to Japan was more stressful than it needed to be. Plan a buffer day or two in case of flight problems / delays.
- Don’t go on cruises. We aren’t cruise people, and International Water days are annoying.
- Don’t connect in the US if it can be avoided.
- Don’t do math at 2 am (see A Minor Freak Out.)
Nomadic people need to pass the Physical Presence Test in order to claim the Foreign Earned Income Exclusion. This requires being physically present in a foreign country or countries for at least 330 days.
There are numerous minutia related to crossing borders when flying into and out of the US, as well as spending time in International Waters. It is important to be aware of these details, as even a 1 day error can cost major dollars. Using a tool like FEIE calc can help with planning while avoiding undue math related stress (and taxes.)