Foreign Earned Income Exclusion Warnings - Update

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This is an update on my previous post warning about the dangers of assuming the Foreign Earned Income Exclusion will prevent you from having to pay taxes.  If you are thinking this, or think the FEI Exclusion will apply to you, please read this post, and my previous post, linked HERE.

This post is based on some IRS actions taken over the last year or so involving the status of a taxpayers tax home in a foreign country.  You see, most people think that meeting either the presence test or the bona fide residence test is enough to qualify for the exclusion.  This is not true.  For both tests, you have to establish a tax home in the foreign country.  Put simply, you need stronger ties to the foreign country than to the United States.  Factors involved in this are living quarters, community ties, financial ties, and social ties.  If you have family, a home and your bank in the U.S., this does not bode well.  If you live on a military base in the foreign country, and rarely leave it, this is not good either.  If you are there are a one year contract, that can be trouble too.  You need to establish bona fide ties in the foreign country.  These can include housing, banking (keep accounts less than $10,000 at all times), friends, family, community activity etc.  You can even try learning the language.  This is one of those "facts and circumstances" things, so there is no definitive test for your foreign tax home, but the more you do the better you are.  The longer you stay and the stronger ties you establish, the safer you will be.

As with my other post, the point is to be careful, and plan ahead.  Have them withhold from your checks as though the exclusion didn't exist, and, even if you get a refund using the exclusion, don't spend the money for a while, since the IRS can come back and take it away.  Obviously if you have a rock solid tax home in a foreign country, like wife, kids, banking and community involvement, you can ignore these warnings.

Charity Made Simple

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I've said before, and I'll say it again: Don't do anything just for the tax benefits!  Usually this is because when you spend money to save on taxes, you save a lot less on taxes than you spend.  Charity contains one of the few exceptions to this: Non-cash contributions (think Goodwill).  It's a total win for everyone!  You give away stuff you don't want, the charity uses it to accomplish its mission, and you get a tax deduction!  That said, charity has a LOT of rules and record keeping requirements, so I'm going to give some simple rules to follow that will make your charitable giving simple and easy.  Most people will be able to tailor their giving to meet these requirements and won't have to read the encyclopedic rules that govern other charity.  Before I do that, let me remind you that charitable contributions are a part of itemized deductions, so, if you don't meet the itemized deduction threshold, you don't get any benefit from charitable giving.  

Here's the simple system:

1.  Give to established, mainstream charities who can confirm that they are allowed to receive tax deductible contributions and will provide you with a receipt.

2.  Give less than $250 by check or charge (no cash) to any given charity, on any given day.  (This means you can give your church or charity over $90,000 in a year without needing a written acknowledgement, and you can give to as many different organizations as you want. You can even give over $12,000 in weekly donations via $249 checks in the collection plate.)

3.  If you want to donate more to your church, make sure they provide a written statement acknowledging the donation and that it specifies that no goods or services were provided by them to you (intangible religious benefits such as church services don't count).  The acknowledgement will usually cover the entire year.

4.  Don't make donations with strings attached, designated for a specific person, or in return for something provided by the charity.

5.  If you make non-cash contributions, take a picture of the donated items (save it on your computer, no need to print), make a list of the donated items, and get a receipt (unless dropped at a dropbox - see below).

6.  Do not donate more than $5,000 worth of items in a single day.

7.  Do not donate more than $5,000 of a category of items (such as books) in a single year.

Follow rules 1 through 4 above and your cash contributions will be simple and easy.  5 through 7 will simplify non-cash donations).  The next four items are special cases that tend to come up, and/or cool tricks you can use.

1.  The drop box exception. I have called this the loophole you can drive a truck through.  You need a receipt if you donate non-cash items with the exception of places that don't normally provide a receipt.  The publications specifically list drop boxes as an example.  So you can donate non-cash items to a drop box, and make your own receipt.  I still recommend taking pictures and making a list, and you may want to take a picture of the drop box.  This exception is ripe for abuse, but don't lie to the IRS.  Trust me.  You will need the location of the drop box, the organization that placed it, their local address, the date you donated the items, the value of the items and a list of the items.  From this, you can make your "receipt."

2.  Garage sales.  I like garage sales.  What I don't like is when the vultures come around later in the day, offering you pennies for your items because they know you want to get rid of them.  Don't do it!  Sell your stuff for a reasonable price, then, while everything's on the table after the sale, take pictures of it all, load it into your car, and drop off at Goodwill or another place that takes non-cash contributions.  Or take them to a drop box like we talked about above.  If you itemize, you'll do better on your taxes than the pennies you'll get from the late comers.

3.  Auctions, dinners and shows.  If you buy a ticket for an event from a charity, you only get to deduct the difference between what you paid for the ticket, and the value of what you receive.  Good charities will provide this information.  If the values are close, don't waste your time with the deduction, just be happy you're helping a good organization.  Raffle tickets are not deductible.

4.  Volunteering.  Your time is not deductible.  Your legitimate expenses in providing your time are.  Don't try comingling vacations and volunteering, travel deductions for charity work are only deductible if charity is the sole purpose of the trip.  If you travel for volunteering with no significant personal enjoyment involved (other than the joy of giving) you can deduct your travel expenses (airfare, lodging, mass transit).  You can also deduct mileage (14 cents a mile - Mile IQ is a good way to track this), meals when away overnight, and uniforms that aren't suitable for everyday use.