THE FOREIGN SERVICE JOURNAL | JANUARY-FEBRUARY 2024 55 year (beginning in 2023). If the taxpayer corrects the failure to take the correct RMD amount in a timely manner (within two years), the excise tax is reduced to 10 percent. • Provides new exceptions after Dec. 31, 2023, to the 10 percent early withdrawal penalty for distributions of up to $1,000 per year for emergency expenses (unforeseeable or immediate financial needs for personal or family emergencies) and for certain victims of domestic abuse who withdraw the lesser of $10,000 or 50 percent of their account (subject to self-certifying requirements). Readers should review the Secure Act 2.0 IRS FAQs and other IRS information before initiating a withdrawal under these exceptions. • Owners of Roth employer retirement plan accounts (such as the ROTH TSP) are no longer required to take required minimum distributions from the Roth starting Jan. 1, 2024. New Energy Credits The IRA legislation passed energy credits that became effective starting in 2023. These credits include the Energy Efficient Home Improvement Credit, the Residential Clean Energy Credit, the Clean Vehicle Credit (for new vehicles), the Previously-Owned Clean Vehicle Credit, and the Alternative Fuel Refueling Property Credit. We recommend readers refer to the following IRS FAQs: https://irs.gov/pub/taxpros/ fs-2022-40.pdf (related to the home improvement and residential clean energy credits), https://irs.gov/pub/taxpros/ fs-2023-22.pdf (related to both clean vehicle credits), and IRS Notice 2023-59 (related to guidance on home energy audits for purposes of the home improvement credit). The IRS is expected to provide additional guidance on the alternative fuel credit for 2023 returns; however, readers can refer to the Form 8911 instructions for assistance. For additional information, readers are also referred to https://energystar.gov/ about/federal_tax_credits and https://fueleconomy.gov/feg/ taxcenter.shtml. Foreign Earned Income Exclusion (FEIE) Taxpayers living and working overseas may be eligible for the FEIE. In 2023 the first $120,000 of gross taxable income earned overseas as a non-U.S. government employee or selfemployed person may be excluded from federal income taxes but not from self-employment taxes. To qualify to claim this exclusion, the taxpayer must: (1) Establish a tax home in a foreign country; (2) Either (a) meet the “bona fide residence” test, or (b) meet the “physical presence” test; and (3) File a Form 1040 tax return with Form 2555 for the year the FEIE is claimed. Tax Home The tax home is the general area of the taxpayer’s “main place of business, employment, or post of duty” (i.e., where the taxpayer is “permanently or indefinitely engaged to work as an employee or self-employed individual”). The U.S. Tax Court has explained that the congressional purpose of the FEIE is to offset duplicative costs of maintaining distinct U.S. and foreign households. Increasing ties to the foreign country by personally paying for a foreign household, paying local taxes, waiving diplomatic immunity for matters related to your job, paying for vacation travel back to the United States, becoming a resident of the foreign country, and working in the foreign country long-term are other factors the federal courts have cumulatively recognized as establishing a foreign tax home. Bona Fide Residence Test The bona fide residence test is a facts and circumstances test aimed at assessing whether the taxpayer intends to make a home outside the United States for an indefinite period. This test requires that the taxpayer be a bona fide resident of a foreign country for an uninterrupted period that includes (at a minimum) an entire tax year (Jan. 1 through Dec. 31). The taxpayer may leave the foreign country for brief or temporary trips back to the United States (for periods not greater than six months in a calendar year) or elsewhere during the bona fide residence period but must have a clear intention of returning to the foreign country. Physical Presence Test The physical presence test requires that a taxpayer be present in a foreign country for at least 330 full (midnight-tomidnight) days during any 12 consecutive months that begin or end in the tax return filing year (the 12-month period may be different from the tax year). Taxpayers who qualify for the physical presence test using a 12-month period other than a full calendar year are required to prorate the maximum exclusion allowed for that tax year. Travel days to and from the United States generally do not count toward the total for days inside the foreign country (they are considered U.S. days). Other FEIE Considerations AFSA understands that IRS auditors have denied the FEIE for Foreign Service spouses and dependents for failing to meet the bona fide residence or tax home elements of this test. Members of the Foreign Service community have successfully used the physical presence test when bona fide residence cannot be established. Those who rely on physical presence should contemporaneously document travel days and retain copies of visas and tickets to substantiate their calculation.
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