The United States has long been the destination of flight students from around the world. Now the U.S. is
exporting many of its home-grown pilots as well. The recession and stagnant economy have hit domestic
aviation, resulting in many American pilots moving abroad and flying in Asia, Africa and Europe.
We get a lot of questions from pilots who work abroad about their US taxes and decided to put together a
brief guide to help you navigate this treacherous field.
If you are a U.S. citizen or a Green Card holder, you are taxed on your worldwide income. This applies
whether you live inside or outside of the U.S., or whether you are performing services in domestic or
international airspace.
However, U.S. citizens and resident aliens who live and work abroad may be able to exclude all or part of
their foreign earned income. In addition, they may also qualify to exclude or deduct certain foreign housing
costs.
General rule
To qualify for the foreign earned income exclusion, you must:
- Be a U.S. citizen or resident alien (for federal tax purposes)
- Have foreign earned income (income received for working in a foreign country)
- Have a tax home in a foreign country
-
Meet either the
Bona fide residence test
or the
Physical presence test
Meeting the Physical Presence test is a challenge for the pilots. Each day spent on the US ground or over
the international waters counts towards the 35 days limit in USA required for the Physical Presence test
qualification. Bona Fide test does not have this rigid restrictions and you should use this test as soon as
you have spent one full calendar year working abroad.
Provided that you meet the above qualifications, and work on international flights, you may qualify to
exclude some or all of your foreign earned income from U.S. income tax, as long
as your tax home is in a foreign country throughout your period of bona fide
residence or physical presence abroad.
Whether you work as a flight crew member (pilot, engineer, flight attendant) for either a U.S. employer or
foreign employer should have no effect on the determination of whether you qualify for the foreign earned
income exclusion. The qualifying factor is not the employer type but your Tax Home.
Tax home
To qualify for the foreign
earned income exclusion, your tax home must be in a foreign country. Your tax home is generally located
at your regular or principal place of business (unless you have a U.S. abode). If you are a flight crew
member, this generally means that your tax home is your base station; the location of the airport from which
your flights originate.
However, even if you are based in a foreign country, if you have an abode in the U.S. you will not have a
tax home in a foreign country. "Abode" has been variously defined as one's home, habitation, residence,
domicile, or place of dwelling. It does not mean your principal place of business and does not mean the same
as "tax home”. The location of your abode will often depend on where you maintain your family, economic, and
personal ties. Having a U.S. abode will disqualify you from claiming the foreign earned income exclusion.
Example:
A U.S. citizen flight crew member based at an airport in Chicago, but residing in Mexico, will be
determined to have a tax home in Chicago (regular or principal place of business). Thus, the U.S. citizen
flight crew member will not be entitled to claim the foreign earned income exclusion. Alternatively, if
the crew member is based at an airport in Mexico, but maintains his abode in the U.S., the individual
still cannot claim the foreign earned income exclusion because the individual has an abode in the U.S.
American pilots with a U.S. tax home do not qualify for the foreign earned income exclusion of income earned
abroad and do not have foreign credits to offset the U.S. tax. However, there are other means, such as
generous per diem deductions and flight crew travel expenses that can be utilized.
If you don’t qualify for the foreign earned income exclusion, you will still be able to take advantage of
other deductions. Pilots, flight crew, dispatchers, mechanics, and control tower operators who are under
Federal Aviation Administration regulations can deduct a higher percentage of meal expenses while traveling
away from your tax home if the meals take place during or incident to any period subject to the Department
of Transportation's “hours of service” limits. The percentage is 80%. (vs standard 50% deduction limit).
Those deductions can significantly reduce taxable income and lower the final tax bill.
Foreign Country
A foreign country is any territory (including its airspace and territorial waters) under the sovereignty of
a government other than the United States.
For thе purposes of the foreign earned income exclusion and the foreign housing exclusion/deduction, the
terms "foreign," "abroad," and "overseas" refer to areas outside the United States, American Samoa, Guam,
the Commonwealth of the Northern Mariana Islands, Puerto Rico, the U.S. Virgin Islands, and the Antarctic
region.
The term "foreign country" does not include ships and aircraft traveling in or above
international waters.
Foreign earned income
Earned income is wages, salaries, professional fees, and other amounts received as compensation for personal
services. To qualify for the foreign earned income exclusion, the income must be earned in a foreign
country. The place where the services are performed determines whether the income is foreign, not
the location of the employer or place of payment. For example, if you are a U.S. citizen flight
crew member, living and working abroad, receiving wages for services performed in China, those wages qualify
as foreign earned income even if you are working for a U.S. airline who deposits your paycheck in a U.S.
bank account.
As mentioned above, the term “foreign country” includes its airspace and territorial waters, but does not
include airspace over international waters, the United States, U.S. territories, or Antarctica.
As a result, income earned for performing services as a flight crew member
may need to be apportioned to the actual time spent performing services in a foreign country in order
to properly determine the amount of foreign earned income.
If you are a flight crew member performing services on international flights, your earned income will need
to be apportioned between the:
-
Income earned in a foreign country (or countries), including the country’s airspace and territorial waters
-
Income earned airspace other than a foreign country (which includes both US airspace and international
airspace).
Only the portion of income earned for services provided in or over a foreign country is eligible for the
foreign earned income exclusion.
Example:
A U.S. citizen flight crew member based at an airport in France mostly works roundtrip flights from France
to the United States. When working these roundtrip flights, the aircraft flight path generally crosses
France, Spain, and Portugal before crossing international waters and entering U.S. airspace. Income earned
for providing services in France prior to departure and while flying in French, Spanish and Portuguese
airspace is foreign earned income. Income earned for services provided while the aircraft is
flying over international waters, in U.S. airspace, and on the ground in the United States is not foreign
earned income.
Computing the amount of Foreign earned income
A flight crew member’s earned income is based, in large part, on the services performed from the time the
aircraft starts moving away from the gate for departure (“block out” time) until the time the aircraft stops
at the gate upon arrival (“block in” time). While the crew member’s earned income is generally computed by
the airline based on the actual flight or block time, all of the time spent providing required services
(pre-flight, flight, post flight time, training, and other required services) must be taken into account
when allocating earned income to the location where they were earned.
We have created this page for tips on tracking flight time and international water boundaries:
https://www.taxesforexpats.com/articles/expat-tax-rules/how-to-track-travel-days-for-us-pilots-flying-international-routes.html
Time basis is used for allocating earned income between “foreign” and “other”.
Thus, if you are a flight crew member on international flights, you should be keeping as accurate a record
of your hours of service as is possible.
In order to compute the amount of your foreign earned income, you will need to compare your time for
services performed in and over foreign countries (including their airspace and territorial waters) to your
total time spent performing services during the taxable year. This comparison can be expressed by a
fraction:
The result is the amount of your foreign earned income (income earned in and over foreign countries,
including their airspace and territorial waters).
Vacation pay and sick pay are included as total wages earned. Thus, vacation pay and sick pay are allocated
between “foreign” and “other” based upon the actual time spent performing services in foreign countries and
in other places. However, used vacation time and sick time do not go into the numerator or denominator of
the fraction outlined above.
The IRS regulations have obscure spots. Lack of clarity leads some accountants to conclude that
international waters begin three miles off the coast, while others say the boundary starts 200 miles
offshore.
Because flight time between two cities may vary based on the actual flight route, location of the jet
stream, weather, and other factors, the most accurate way to determine the time spent in and over foreign
countries is by using detailed records (flight plans) for each flight reflecting the flight’s planned route
and the planned flight time. The flight plan includes a lot of information about the flight, including the
route designated by its latitude and longitude readings as well as the estimated flight time between those
points. The flight plan will also show the total estimated flight time from the flight’s block out to its
block in. As a result, it is possible to plot the geographical points and determine the actual planned time
spent flying over foreign countries.
Valuable tools for international pilots
There may often be difficulty securing and reading actual flight plans. This process is burdensome for crew
members who fly a large number of international flights during the taxable year.
Don’t overlook a valuable time saving tool: many airlines are providing crew members a breakdown reflecting
the “average” flight time components of flight segments in and over foreign countries (sometimes called
“Duty Time Apportionment” or “Flight Time Apportionment”). These apportionments, if reasonable,
are acceptable as a means to determine the amount of foreign earned income.
We hope this guide was useful in clearing up some complex tax issues that American pilots working overseas
encounter.
We’d be happy to assist with your tax preparation or questions - stop by our website:
www.taxesforexpats.com
or send us an email to success@tfx.tax.
