What do you need to know about taxes now that you are about to become an expatriate?
US citizens and resident aliens ("Green Card" holders) living or traveling outside the United States generally are required to file income tax returns, estate tax returns, and gift tax returns and pay estimated tax in the same way as those residing in the United States.
Alamo Bookkeeping & Tax Service is experienced with the tax issues expatriates face. Please contact us for information concerning your individual circumstance. Simply email us using the Information Request form at the bottom of this page.
Even though the United States is one of the few countries in the world that requires its citizens to file an annual tax return no matter where in the world they are living and/or working, there are some tax advantages available to those taxpayers working outside of the U.S. The Foreign Earned Income Exclusion is one of them.
If you meet certain requirements, you may qualify for the foreign earned income and foreign housing exclusions and the foreign housing deduction (also known as Section 911 Exclusion). If you are a US citizen or a resident alien of the United States and live abroad, you are taxed on your worldwide income. However, you may qualify to exclude up to $100,800 of your foreign earned income. In addition, you can exclude or deduct certain foreign housing amounts.
To claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, you must have foreign earned income, your tax home must be in a foreign country, and you must be one of the following:
- BONA FIDE RESIDENCE TEST
- A US citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year (January 1 through December 31),
- A US resident alien who is a citizen or national of a country with the United States that has an income tax treaty in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year, or
- PHYSICAL PRESENCE TEST
- A US citizen or a US resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.
If you qualify under either the bona fide residence test or the physical presence test for only part of the tax year, you must adjust the maximum exclusion limit based on the number of qualifying days in your tax year. The number of qualifying days in your tax year is the number of days within the period you have your tax home in a foreign country and meet either test.
To claim the Foreign Earned Income Exclusion and Foreign Housing Exclusion, you must file Form 2555, Foreign Earned Income with your tax return. All tax returns that contain a Form 2555 must be filed with the Internal Revenue Service Center, Austin TX.
It is important to keep a travel calendar, starting with the first day you leave the United States. This travel calendar is essential to determine when or if you have qualified for the foreign earned income exclusion under the physical presence test. A small pocket calendar is the easiest to use.Request information about Foreign-Earned-Income-Exclusion below
In addition to the foreign earned income exclusion, you can also separately claim exclusion or a deduction from gross income for your housing amount if your tax home is in a foreign country and you qualify under either the bona fide residence test or the physical presence test.
Keep all receipts and canceled checks to substantiate your housing expenses. You will also need to be able to identify amounts that are reimbursed and those that are not reimbursed. You will also need to indicate whether you pay your housing expenses directly or if the company pays these expenses directly to a third party on your behalf.
Foreign Tax Credit and Foreign Taxes Paid or Accrued
Generally speaking, you are allowed a credit against your US income tax for all or part of the income taxes you pay to foreign countries. In some countries, payment of Social Security-type taxes is also required.
If you take the foreign tax credit, you must file Form 1116, Foreign Tax Credit, with Form 1040. Form 1116 enables you figure the amount of foreign tax paid or accrued that you can claim as a foreign tax credit.
The foreign tax credit is limited to the part of your total US tax that is in proportion to your taxable income from sources outside the United States compared to your total taxable income. The allowable foreign tax credit may not be more than your actual foreign tax liability.
Instead of taking the foreign tax credit, you can deduct foreign income taxes as an itemized deduction on Schedule A (Form 1040). This is usually not advantageous; taking the foreign tax credit is usually more effective in reducing your tax liability, particularly if your itemized deductions are subject to the phase-out rules for high-adjusted gross income.Request information about Foreign-Tax-Credits below
If you are a US citizen or resident alien and both your tax home and your abode are outside the United States and Puerto Rico on the regular due date of your return (April 15), you are automatically granted a 2-month extension to file your return and pay any tax due (June 15).
Your return is considered filed on time if it is postmarked on or before midnight of the due date for filing the return (including any extensions). None of the dates for filing returns or paying taxes is extended due to foreign holidays.
If you use the 2-month extension discussed above, you must attach a statement to your return showing that you qualify for it. Write or type the following at the top of the first page of the Form 1040 and on the bottom of the second page of the Form 1040:
"Extension automatically granted to June 15, 20___ pursuant to Reg. 1.6081-5."
If you have funds in a foreign bank, you are required to file Treasury Form, 90-22.1, but only if your funds exceed $10,000. If you have a foreign account, but the balance does not exceed $10,000 during the calendar year, then instead of filing Treasury Form 90-22.1, at the bottom of Schedule B, Interest Income, the question "Do you have a foreign bank account?" will be answered "No."
Treasury reporting requirements have been increased and penalties for not reporting this information can lead to large penalties! PLEASE DO NOT IGNORE!Request information about Taxes-and-Foreign-Bank-Accounts below
A resident alien is generally taxed, as is a U.S. citizen, on his worldwide income. In contrast, non-resident alien individuals are not taxed on their worldwide income. Instead, a special regime is applied to them. If the non-resident alien individual is not engaged in a US trade or business, he is subject to a flat tax of 30% (or lower treaty rate) on the gross amount of certain kinds of US source income (generally speaking, his passive investment income). That tax is usually withheld by the US payor at the source.
A non-resident alien who is engaged in a US trade or business but does not maintain an office in the US is subject to tax on only what is physically earned in the US. But if there is an office in the United States, certain limited kinds of foreign source income may be treated as effectively connected with his US trade or business and thereby be included in his U.S. tax base.
Since the starting point for either scheme is the resident versus non-resident status of the alien individual, the concept of "residence" for that purpose is a key determinant.
An alien individual is a resident alien if he meets the lawful permanent residence test or the substantial presence test, or if he elects to be treated as a resident alien. Terms for these tests are defined positively. "Non-resident alien" is defined negatively. That is, a non-resident alien is a person who is neither a US citizen nor a resident alien.Request information about Dual-Status-and-Non-Resident-Aliens below