you are a U.S. citizen or a resident alien of the U.S., 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 foreign or international airspace. However, qualifying
U.S. citizens and resident aliens who live and work abroad may be able to exclude from their income all or part of their foreign
earned income. In addition, they may also qualify to exclude or deduct certain foreign housing costs.
May 2008 Foreign Earned Income Exclusion article, in this series of International Tax Gap articles, highlights the general
rules for qualifying and claiming the exclusion of foreign earned salary, wages, or other compensation received for personal
services. The January 2009 Foreign Housing Exclusion or Deduction article highlights the general rules associated with claiming
the foreign housing cost exclusion or deduction.
This article highlights the foreign earned income exclusion and foreign
housing exclusion/deduction rules as they apply to U.S. citizens performing services in foreign and international airspace.
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),
a tax home in a foreign country, and
Meet either the bona fide residence test or the physical presence test.
If you are a U.S. citizen flight crew member 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.
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 not qualify you to claim the foreign earned income exclusion.
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 principle 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.
A foreign country is any territory (including its airspace and
territorial waters) under the sovereignty of a government other than the United States. For 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. Nor does it include offshore installations which are located outside the territorial
waters of any individual nation.
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, and
Income earned in other than a foreign country.
Only the portion of income earned for services provided in or over a foreign country is eligible for the foreign earned
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
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.
Time basis is the method 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:
Total time worked in and over
--------------------------------------------------------------- x Total wages earned
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.
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.
Some crew members,
however, may have difficulty securing and reading actual flight plans. Also, this process can be burdensome for crew members
who fly a large number of international flights during the taxable year. As a result, 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"). Per a recent court case, Rogers v. Commissioner
(T.C. Memo 2009-111), these apportionments, if reasonable, are acceptable as a means to determine the amount of foreign earned
If you need help understanding the tax rules and benefits for International Flight Crews, Pilots,
Copilots and flight attendants please contact us. Let us help you prepare your expatriate tax return.