An overseas sabbatical gives a professor a new perspective and the chance to interact with colleagues in ways not always possible while in the United States. Planning ahead can help ensure the tax consequences and record-keeping requirements of an overseas sabbatical are understood.
As an example, a professor was planning to go on sabbatical in France for about one year and wanted to know how her income would be taxed. She was receiving half of her university salary and also a fellowship for research from the university in France. Under the U.S.-French treaty, no income tax would be due in France on her sabbatical income. She had two options:
- Establish her tax home in and stay in France for more than one year and be physically present in a foreign country at least 330 full days during a 12-month period. Under this scenario, up to $101,300 (2016 threshold) of her income earned in France could be excluded from taxation on her U.S. tax return. She may also be able to claim an exclusion based on her foreign housing costs if she paid for the housing. Since the professor had plans to travel back to the United States during her sabbatical, she would need to track her days in the United States and be careful to ensure she could meet the 330 full days requirement.
- Spend less than one year in France, keep her tax home in the United States, and treat the time in France as a business trip. She would report her foreign earned income as taxable and deduct her business and travel expenses against that income. She would also have to keep records of all of her travel and business expenses, making it easier to gather the information needed to prepare her tax returns.
In our example, the professor was unable to satisfy the requirements for taking the foreign earned income exclusion and the foreign housing exclusion, because she was unable to stay more than a full year before returning to work at her home university. She reported her income as fully taxable and completed Form 2106 to deduct her travel and other expenses (including unreimbursed lodging and meals). Because she opened a bank account while in France to use during her stay, she needed to report on FinCen 114 because the account balances exceeded the reporting threshold.
Before leaving the country for a sabbatical or business trip, make an appointment to talk with one of our International Tax Group members to ensure you know your options and record-keeping requirements.
Next week we will talk about scholarships and fellowships to wrap up our series on the special international tax issues faced by students, scholars, and professors.