Tax: The Final Frontier? Foreign earned income exclusion and space travel
Astronauts, taxes, and the foreign earned income exclusion—why NASA space travel doesn’t exempt taxpayers from U.S. taxes
“3…2…1. We have liftoff!”
This is often the last message astronauts hear from mission control before leaving Earth to start a months-long journey. And astronauts have to be prepared for this voyage in more ways than physically and mentally. The 50th anniversary of the Apollo 11 Moon landing brought one question back into the limelight: what happens with taxes for NASA employees and other taxpayers in outer space?
It all started in 1970 with Jack Swigert, a last-minute addition to the Apollo 13 crew, who radioed Houston's mission control center for tax help while the mission was underway to get a filing extension he didn’t request before blasting off. It continued in 2005 when NASA astronaut Leroy Chiao -- commander of the 10th expedition to the International Space Station -- was in orbit when tax day rolled around in 2005. Chiao had no choice but to manage his taxes from space and get a filing extension.
Can the long reach of the IRS catch taxpayers in space?
The short answer is yes. The IRS will expect a return from taxpayers even if they are colonizing Mars. But do space dwellers receive the same treatment as all other taxpayers?
The astronaut’s tax professional faces some unique questions in preparing tax returns for their clients in space. The foreign earned income exclusion (FEIE) is a powerful tool for combatting double taxation by excluding foreign income from U.S. taxation. Although this would not be available for a NASA astronaut because government employees don’t qualify, it can apply to individuals employed by private space companies not engaged in the transportation industry. Transportation industry income falls under its own rules for sourcing when transportation occurs in space.
If a taxpayer working for these companies meets a series of tests, they can exclude a large amount of their foreign-earned income from U.S. taxation.
However, one common element of those tests is the requirement that a taxpayer must be physically present in a foreign country for a set amount of time.
Foreign countries only include land, air, and sea spaces controlled by a government other than the U.S.
A common point of confusion for taxpayers, and one of the perennial sources of litigation in Tax Court, is what counts as “being present in a foreign country.” The strict definition of a “foreign country” is “any territory under the sovereignty of a government other than that of the United States.” This definition specifically does not include any area designated as “international waters” or as an “international commons.” This means that the most basic definition of “a foreign country” is exclusive: it must be territory controlled by a foreign government. This includes not only the land controlled by a foreign government, but also the air and sea spaces above and around a country.
Importantly, this means that entire categories of workers may think they qualify for the FEIE when they really do not because their work takes them into international waters, international airspace or even outer space.
International common areas don’t count as a foreign country
In addition, international commons, such as outer space, the Moon, or the seabed beyond the territorial waters of any country, do not qualify as “in a foreign country” for purposes of the FEIE. So, researchers assigned to Antarctica, or those conducting deep sea research, or who serve onboard the International Space Station are not present in a foreign country for FEIE purposes. This means they cannot claim the FEIE. Instead, under the Internal Revenue Code, the income is sourced to where they are a citizen or resident. If the taxpayer is a U.S. citizen or resident, then this is U.S. source income and not foreign income and taxed in the U.S.
With the real possibility of commercial space travel on the horizon from companies like SpaceX, special rules could apply to certain types of space transactions. These include transportation income, such as from transporting people or products in space, and mining income. In these types of ventures, the transportation and mining itself might not be considered “space activities” and would presumably fall under the rules for transportation and mining income rather than the general rule for U.S. citizens and residents. These exceptions would need to be carved out specifically.
One might think that signing up to colonize Mars could keep the IRS from sending a notice, but it’s clear that travelling to even the furthest reaches of our solar system won’t exempt taxpayers from U.S. taxes.