Fred currently earns $9,000 per month. Fred has been offered the chance to trans

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 102,100.

How much U.S. gross income (taxable) from compensation will Fred report if he accepts the assignment abroad on January 1 of next year and works overseas for the entire year?

How much of the compensation income will be excluded?

If Fred’s employer also provides him free housing abroad (cost of $20,000), how much of the $20,000 is excludible from Fred’s income?

How much of the housing is includible (taxable)?

Explanation / Answer

a) Fred will earned $120,000 ($10,000 per month*12 months) by going abroad. Thereofore his total compensation income is $120,000 but he can exclude $102,100 under foreign earned income exclusion. Hence Fred will report gross income of $17,900 ($120,000 - $102,100) from the salary earned.  

Compensation income to be excluded = $102,100

b) Since Fred meets the requirements for the foreign earned income exclusion, he may also exclude the employer provided housing cost that exceed $16,336 ($102,100*16%) upto a maximum of $14,294 ($102,100*14%).

Thus Fred may exclude $3,664 ($20,000 - $16,336) (the lesser of $3,664 or $14,294).

Fred will include $16,336 ($20,000 housing cost - $3,664 exclusion) of the employer provided housing in gross income.

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