US Taxation for Seafarers

How the IRS tax Seafarers

As a new seafarer or someone who has come from a completely different industry, it may be odd at first, being paid without a tax deduction on your income. You may be confused on how to declare your income or what liabilities and obligations are attached that you are unaware of, but what might come as a pleasant surprise is the exemptions that you and your crew may just be entitled to.

Declaring Your Income

As a US national, you are required to file a U.S. tax return, declaring all the worldwide income you make during the tax year, running alongside the calendar year, from the 1st of January to the 31st of December.

Some people are capable of filing their own returns, but if you do not feel comfortable, it is recommended that you enlist the help of a professional. At Bambridge accountants, we offer an excellent service with the knowledge that comes second to none for US residents who require professional help with their return.

US Tax Exemptions

U.S. Seafarers can be eligible for FEIE, or Foreign Earned Income Exclusion. This exemption is meant for U.S. nationals who live and work overseas and gives eligible workers the opportunity to file for 100% tax relief on the first $107,600 in the 2020 year, this figure increases each year to account for inflation.

This does not mean that you and all your crewmates can now throw a party and live a tax-free life, as there are some conditions that you must meet before you can file for this exclusion!

Eligibility

In order to be eligible for FEIE, you must meet one of the following;

• The Physical Presence Test (The PPT)
• The Bonafide Residence Test (THE BRT)

Both tests are made with the intention to determine whether you stay outside of the US is sufficient enough to warrant this exemption.

The Physical Presence Test

The first of the two tests, the PPT, is judged on how many days have been spent in or outside the US in the year. To qualify for FEIE using the PPT, you must have been outside the US for 330 days of any 12-month period. The days spent travelling to and from the US do not count towards the total.

As mentioned, these days can be over any 12-month period, not just the tax year. However, if the 12 months fall outside the tax year, the exclusion will be proportioned between the 2 years, depending on how many months you are claiming for are in each tax year – For example, if the 12-month period you use is March 2018 to March 2019, 9/12 of the exclusion will be used in 2018 and the remaining 3/12 will be used for 2019.

The Bonafide Residence Test

The second of the two tests, the BRT, is tested on the basis that you have a legitimate residence outside of the US for an uninterrupted period. This uninterrupted period must include a full tax year. For example, if you are working for extended periods outside the US and have no intention of returning, you will have created a Bona Fide Residence and therefore passed this test for eligibility.

Bypassing using the BRT, it means you are not restricted to the 35 days inside the US, as you are using the PRT (365 days minus 330 days). So, once you have this residence, you could spend multiple months back inside the US, as long as you intend to keep your residence outside the US.

There are no specific guidelines on your returning period and how long you can return for, but if you are spending the majority of the year within the US, it would be hard to fight the case that it is not your primary residence and thus you would most likely lose your eligibility via BRT.

Summary

To summarise, you may be eligible for FEIE and should be making the most of it if you are! If you feel you are eligible but have already filed multiple returns for previous years, there is no need to worry as you can claim FEIE for the previous years you were eligible.

For expert tax advice for seafarers and offshore citizens contact our charters US accountants