Innocents Abroad, Beware of the Tax Man

Let's say you went overseas in October 2004. To pass this test, you would then have to stay through December 2005 because the rules say you must be there a full year. At that point, you could take one-quarter of the $80,000 as an exclusion for the 2004 tax year and then get the full exclusion for the 2005 tax year.

But what if you don't stay overseas for a full tax year?

In that case, the physical-presence test might be the way to go. To get the full $80,000 exclusion, you must be in the foreign locale for any 330 days during a 12-month period.

But the calendar tax-year requirement still applies. So if you were in England for 330 days during 2004, you'd get the full exclusion. But if you were sent there on Oct. 1 and spent 330 days there over the following 12 months, you'd only qualify for one-quarter of the exclusion on your 2004 tax return. Note that you don't have to remain overseas for a full tax year under the physical-presence test. So if you went home on Sept. 30, 2005, you'd still be able to claim three-quarters of the exclusion.

Housing Exclusion

If housing costs at home in New Jersey are less than those in London, your company may help with the difference. But if you get housing reimbursement, it is considered income and becomes taxable.

The good news is that any amount you spend above that reimbursement may be excluded from your tax bill.

The amount of the housing reimbursement is based on a quirky government equation. Basically, it's 16% of a midlevel bureaucrat's salary. So for 2004, the floor was $11,581, notes Bob Fuerst, a senior tax editor at RIA, a Thomson business providing tax information and software to tax professionals. While that amount is taxable, any additional housing expenses above $11,581 may be wiped out thanks to the housing exclusion.