bona fide resident in form 255

I think that's wrong conclusion since answering 'no' to first question is possible even with 0% tax. I'd like to confirm this since the possibility of working in the middle east (where tax is 0 in many countries) is something I think about.

-Antony

I have a few acquaintances that are employed in Abu Dhabi of the UAE. There is no income tax. They are also not bona fide residents as they are there under either a 1 year or 2 year contract. There contract would have had to have been either for an indefinite period or extended indefinitely for them to have been bona fide residents. However, each one of them qualified for the exclusion under the physical presence test. Now... if they were assigned indefinitely and met the time period requirements such that they were bona fide residents of the UAE, they would not submit any statement that they were nonresidents to avoid being taxed, as there is no tax to avoid. The answer to Q 13a would be No and the answer to 13 b would be No.

So this might eliminate the federal income tax. But states (or at least some of them) don't recognize form 2555, so they will tax your foreign income. Is there any way to mitigate state taxes? I am aware of California's safe harbor:

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Safe Harbor For taxable years beginning on or after January 1, 1994, a safe harbor is available for certain individuals leaving California under employment-related contracts. The safe harbor provides that an individual domiciled in California who is outside California under an employment-related contract for at least 546 consecutive days will be considered a nonresident unless any of the following is met: ? The individual has intangible income exceeding $200,000 in any taxable year during which the employment- related contract is in effect. ? The principal purpose of the absence from California is to avoid personal income tax.

The spouse/RDP of the individual covered by this safe harbor rule will also be considered a nonresident while accompanying the individual outside California for at least 546 consecutive days. Return visits to California that do not exceed a total of 45 days during any taxable year covered by the employment contract are considered temporary. Individuals not covered by this safe harbor determine residency status based on facts and circumstances. The determination of residency status cannot be solely based on an individual?s occupation, business, or vocation. Instead, consider all activities to determine residency status. For instance, students who are residents of California leaving this state to attend an out-of-state school do not automatically become nonresidents, nor do students who are nonresidents of California coming to this state to attend a California school automatically become residents. In these situations, individuals must determine their residency status based on their facts and circumstances (as described in Section D, Guidelines for Determining Residency, and Section E, Temporary or Transitory Purposes).

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You would have to check with each state. Here in NM, once domiciled you remain a resident until you change domicile. However, NM starts with Federal AGI and does not require you add back the exclusion. Therefore, you would only be subject to NM tax on any excess of wages plus your other income. I just did a NJ and NC return. NJ is a gross income state so you would pay tax on the amount excluded. I did not see anything similar to the CA definition on residency as long as you still have a permanent home there. NC starts with federal taxable income and like NM, does not require that you add back the exclusion. I did not look at their residency rules.

Regarding California's 546 day safe harbor rule (if you're away on a contract more than this number of days you will be considered a non- resident as long as your income is not that high). What if your contract is two or more years long but you cut it short so that it was less than 546 days. Do you still get to use safe harbor?

Katie Jaques (our resident CA expert) answered this question in 2005:

"If you look at the construction of the sentence, I think it is clear that the 546 days refers to the length of the absence, not the length of the contract."

"If your friend is actually absent from the state for 546 days or more (and spends no more than 45 days/year in California during that time), the safe harbor rule will apply."

Katie in San Diego

To elaborate further: if the taxpayer is not actually absent for the full 546 days, then the safe harbor does not apply, even if the original contract was for a longer period. The taxpayer may still be a nonresident, however, based on the general "facts and circumstances" standards. If the absence was for a purpose that was not temporary or transitory, the taxpayer is a nonresident even if the absence was cut short due to unforeseen circumstances. There are quite a few SBE decisions involving pre-1993 tax years, where people who had left the state with the intention of being absent for a long or extended period of time and had to return due to changed circumstances (e.g., the Iranian revolution) were held to be nonresidents during their absence even though it turned out to be relatively brief.

One example: In the Appeal of Long, Cal. St. Bd. of Equal., 1993 (unpublished), the taxpayer had intended to be away for 5 years and arranged his affairs accordingly, but was unexpectedly required to return to California after 18 months. The SBE held that his absence was not for a temporary or transitory purpose.

Katie in San Diego