Can I hire my wife to double the foreign earned income exclusion?

[Signs]

I'm looking at relocating outside the U.S. to take advantage of the foreign earned income exclusion. I know that in 2014 the max amount is $99,200. I also know that your spouse can also qualify. Here are my questions...

1. I'm self-employed in the education consulting field. Should I hire my wife as an employee, or treat her as a partner, in order for her to qualify for the exclusion?

2. She would likely be our admin manager in a two-person company. Can I pay her any amount I wish, sufficient to get the max benefit ($99,200)?

3. For the (up to) 30% foreign housing deduction, would that be taken from the gross income...say I earn about $125,000 with $26,000 in housing costs. Would I deduct the $26K and come up with $99K net?

Thanks.

 

[davew128]

I'm not aware of many admin managers in 2 person companies who can justify $99k a year in wages. So while yes, she also can qualify, your problem is the business expense justification for YOUR deduction in the amount you pay her.

 

[Signs]

Thanks, Dave. I wondered about that.

There is also a provision (I think) where she could be my partner,
on a joint venture. Then, she could take whatever amount she
wants.

Is that how you understand it?

 

[LdiJ]

I'm looking at relocating outside the U.S. to take advantage of the foreign earned income exclusion. I know that in 2014 the max amount is $99,200. I also know that your spouse can also qualify. Here are my questions...

1. I'm self-employed in the education consulting field. Should I hire my wife as an employee, or treat her as a partner, in order for her to qualify for the exclusion?

2. She would likely be our admin manager in a two-person company. Can I pay her any amount I wish, sufficient to get the max benefit ($99,200)?

3. For the (up to) 30% foreign housing deduction, would that be taken from the gross income...say I earn about $125,000 with $26,000 in housing costs. Would I deduct the $26K and come up with $99K net?

Thanks.

The whole situation is a lot more complicated that you might realize. You really need a consult with a tax professional who specializes in this kind of tax law. The larger CPA firms generally have someone on board who does. You do realize that if you are eligible for the foreign income exclusion, that means that your income must be subject to tax in the country where you will be residing? I also have some concerns regarding the fact that the majority of your customers will be located in the US.
This is not the type of situation where you should be relying on advice from an internet message forum.

 

[davew128]

You do realize that if you are eligible for the foreign income exclusion, that means that your income must be subject to tax in the country where you will be residing?

100% incorrect. There is absolutely no provision in the FEIE that requires the foreign earned income be taxed in that country of residence.

I also have some concerns regarding the fact that the majority of your customers will be located in the US.

Also wholly irrelevant.

 

[LdiJ]

100% incorrect. There is absolutely no provision in the FEIE that requires the foreign earned income be taxed in that country of residence.

Also wholly irrelevant.

I didn't say it HAD to be taxed, I said it had to be "subject" to tax. Maybe, I am wording that badly. Maybe what I really should be saying is that the taxpayer has to actually be a resident of the country they are living in, for tax purposes. That is the whole purpose of the foreign income exclusion. No, the fact that the majority of his customers are US customers is NOT irrelevant. That opens the door for the IRS to consider his income to be US earned income rather than foreign earned income.

Seriously Dave, I have done an enormous amount of research on this particular subject in the last year. Enough research that I am now referring a couple of my clients to a CPA that specializes in the subject rather than handling their returns myself. Its incredibly complex, particularly for those people who are in business for themselves.

 

[tranquility]

I have a good friend who has lived and created a business in Japan for decades. I long ago stopped doing his returns as it took too much time to keep up and I was never sure about the result. He was a true resident who paid taxes there and did all his business there and it was probably as easy a return as any foreign exclusion return can be, but I had to cut him loose as it was not worth the time.

I think the underlying issue we're having here is the facts seem like they are going to get slippery real fast. I guarantee the IRS looks closely at returns that try to exclude a bunch of income and the person doing it better have a knowledgeable preparer who can look at the whole set of facts carefully before thinking they have found the best tax deal on earth.

 

[davew128]

I didn't say it HAD to be taxed, I said it had to be "subject" to tax. Maybe, I am wording that badly. Maybe what I really should be saying is that the taxpayer has to actually be a resident of the country they are living in, for tax purposes. That is the whole purpose of the foreign income exclusion.

I will agree with you that they need to be present in the foreign country.

No, the fact that the majority of his customers are US customers is NOT irrelevant. That opens the door for the IRS to consider his income to be US earned income rather than foreign earned income.

Nope. The point of the exclusion is that income is earned performing services while overseas. A 2 person business (husband and wife) aren't performing services in the US unless you have a much stronger tie to the country such as US based employees (N/A in this instance).

Seriously Dave, I have done an enormous amount of research on this particular subject in the last year. Enough research that I am now referring a couple of my clients to a CPA that specializes in the subject rather than handling their returns myself. Its incredibly complex, particularly for those people who are in business for themselves.

My biggest area of practice over the last three years is working with foreign reporting for expats and NRAs, many referred by an immigration attorney. Complex? Only if you don't take the time to learn the details.