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Mike · Site Admin Joined: 07 Sep 2004 Posts: 4512 Location:

Nonresident or Part Year Returns, Foreign Earned Income Exclusion for Bona Fide Expatriate Living Abroad, and Foreign Tax Credit to Avoid Double Taxation

Filing Requirements for Citizens

All U.S. citizens who earn more than $4,850 in a year must file a personal income tax return - no matter where they live. if you are a citizen living outside the the U.S., failing to file a tax return can result in the loss of your Foreign Earned Income Exclusion, and thus be a very costly mistake.

As U.S. citizens, we are taxed on our worldwide income. The only way to legally reduce your taxes, and benefit from being outside of the States, is to file before the IRS comes looking for you and take advantage of as many exclusions and tax credits as possible

Foreign Earned Income

Foreign earned income is income you receive for services you perform while living abroad in a foreign country during a period when your tax home is in a foreign country and during which you meet either the bona fide residence test or the physical presence test will determine if you are an expatriate for tax purposes. It does not matter whether earned income is paid by a U.S. employer or a foreign employer.

A qualifying individual may elect to exclude from gross income up to $80,000 of foreign earned income for 2004 and 2005.

To claim the foreign earned income exclusion as an expatriate, 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:

A U.S. citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year,

A U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty with a nondiscrimination article 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

A U.S. citizen or a U.S. 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.

In addition to the election to exclude foreign earned income, a qualifying individual may elect to exclude from gross income a certain amount of employer-provided foreign housing expenses.

For those in high risk, combat, or war zones, additional "safe housing" may be excluded for family members. Common examples are contractors in Iraq and Bosnia.

Special rules apply to those in "camps" located in foreign countries that may allow you to exclude the vale of meals and lodging over and above the foreign earned income and foreign housing exclusions.

NOTE: If you do not file a return, and the IRS audits you, you will probably loose the foreign earned income credit! This can be disastrous, as the U.S. can then force you to pay tax on all of your worldwide income.

Nonresident / Part Year Resident

The U.S. taxes anyone and everyone that lives in the States. If you earned money in the U.S., including salary, dividends, interest, etc., while living here, you must file a tax return.

If you move out of the U.S., you must file a Part Year Resident return. This tells the U.S. you are leaving and taxes you on your U.S. source income.

If you fail to file a final return, the IRS computers think you are still here and may generate "substitutes for returns" for each and every year. This is when the IRS makes far reaching assumptions about your income and sends you a bill. If you don't get the bill, or don't respond, this can become a major problem. The IRS may attempt to get to your foreign wages, assets, and bank accounts!

Foreign Tax Credits

If you paid taxes to a foreign country on foreign source income and are subject to U.S. tax on the same income, you may be able to take either a credit or an itemized deduction for those taxes. It does not matter how long you have been outside the U.S. or whether you are an bona fide expatriate for a foreign tax credit!

Taken as a deduction, foreign income taxes reduce your U.S. taxable income. Taken as a credit, foreign income taxes reduce your U.S. tax liability. In most cases, it is to your advantage to take foreign income taxes as a tax credit.
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