US EXPAT TAX …A CLOSE LOOK
Expatriate Tax Law
As a U.S. citizen or resident alien, your worldwide income generally is subject to U.S.
income tax regardless of where you are living. Also, you are subject to the same income
tax filing requirements that apply to U.S. citizens or residents living in the United States.
However, several income tax benefits might apply if you meet certain requirements while
living abroad. You may be able to exclude from your income a limited amount of your
foreign earned income. You also may be able either to exclude or to deduct from gross
income your housing amount (more later). To claim these benefits, you must file a tax
return and elect the exclusion.
You may be able to claim a tax credit or an itemized deduction for the foreign income
taxes that you pay. Also, under tax treaties or conventions that the United States has with
many foreign countries, you may be able to reduce your foreign tax liability
INCOME EARNED ABROAD
You may qualify for the foreign earned income exclusion of up to $92,900 for 2011 (for
2012 up to $95,100) in income earned while working abroad. However, you must file a
tax return to claim the exclusion. In general, foreign earned income is income received
from services you perform outside of the United States. When we use the term United
States, that includes, Puerto Rico, Northern Marina Islands, Republic of the Marshall
Islands, Federated States of Micronesia, Guam and American Soma. While not all of
these governments are part of the United States, they have special tax status. Excluded
from gross earned income is your allowance housing costs that are over a certain base
amount.
Generally, you will qualify for these benefits if your tax home (defined below) is
in a foreign country, or countries, throughout your period of Bona-fide foreign residence
or physical presence and you are 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 a complete tax year, or
- A U.S. resident alien who is a citizen or national of a country with which the United States 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
- 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.
TAX HOME
Generally, your tax home is the area of your main place of business, employment, or post
of duty where you are permanently or indefinitely engaged to work. You are not
considered to have a tax home in a foreign country for any period during which your
abode (the place where you regularly live) is in the United States. However, being
temporarily present in the United States or maintaining a dwelling there does not
necessarily mean that your abode is in the United States.
A foreign country, for this purpose, means any territory under the sovereignty of a
government other than that of the United States, including territorial waters (determined
under U.S. laws) and air space. A foreign country also includes the seabed and subsoil of
those submarine areas adjacent to the territorial waters of the foreign country and over
which it has exclusive rights under international law to explore and exploit natural
resources.
Waiver of time requirements. You may not have to meet the minimum time requirements
for bona-fide residence or physical presence if you have to leave the foreign country
because war, civil unrest, or similar adverse conditions in the country prevented you from
conducting normal business. You must, however, be able to show that you reasonably
could have expected to meet the minimum time requirements if the adverse conditions
had not occurred.
TRAVEL RESTRICTIONS
If you violate U.S. travel restrictions, you will not be treated as being a bona-fide resident
of, or physically present in, a foreign country for any day during which you are present in
a country in violation of the restrictions. (These restrictions generally prohibit U.S. citizens
and residents from engaging in transactions related to travel to, from, or within certain
countries.) Also, income that you earn from sources within such a country for services
performed during a period of travel restrictions does not qualify as foreign earned income,
and housing expenses that you incur within that country (or outside that country for
housing your spouse or dependents) while you are present in that country in violation of
travel restrictions cannot be included in figuring your foreign housing amount.
Currently, these travel restrictions apply to Cuba, Libya, and Iraq.
EXCLUSION OF FOREIGN EARNED INCOME
If your tax home is in a foreign country and you meet either the bona fide residence test
or the physical presence test, you can choose to exclude from gross income a limited
amount of your foreign earned income. Your income must be for services performed in a
foreign country during your period of foreign residence or presence, whichever applies.
You cannot, however, exclude the pay you receive as an employee of the U.S.
Government or its agencies. You cannot exclude pay you receive for services abroad for
Armed Forces exchanges, officers’ mess, exchange services, etc., operated by the U.S.
Army, Navy, or Air Force.
FOREIGN CREDITS AND DEDUCTIONS
If you claim the exclusion, you cannot claim any credits or deductions that are related to
the excluded income. You cannot claim a foreign tax credit or deduction for any foreign
income tax paid on the excluded income. Nor can you claim the earned income credit if
you claim the exclusion. Also, for IRA purposes, the excluded income is not considered
compensation and, for figuring deductible contributions when you are covered by an
employer retirement plan, is included in your modified adjusted gross income.
FOREIGN AMOUNT EXCLUDABLE
If your tax home is in a foreign country and you qualify under either the bona fide
residence test or physical presence test for all of the calendar year, you can exclude your
foreign income earned during the year up to $91,400. However, if you qualify under either
test for only part of the year, you must reduce ratably the $91,400 maximum based on
the number of days within the tax year you qualified under one of the two tests.
FOREIGN HOUSING EXCLUSION
If your tax home is in a foreign country and you meet either the bona fide
residence test or the physical presence test, you may be able to claim an
exclusion or a deduction from gross income for a housing amount paid to you.
Housing amount is the excess, if any, of your allowable housing expenses for the
tax year over a base amount. Allowable housing expenses are the reasonable
expenses (such as rent, utilities other than telephone charges, and real and
personal property insurance) paid or incurred during the tax year by you, or on
your behalf, for your foreign housing and that of your spouse and dependents if
they lived with you. You can include the rental value of housing provided by your
employer in return for your services. You can also include the allowable housing
expenses of a second foreign household for your spouse and dependents if they
did not live with you because of dangerous, unhealthy, or otherwise adverse
living conditions at your tax home. Housing expenses, for this purpose, do not
include the cost of home purchase or other capital items, wages of domestic
servants, or deductible interest and taxes.
The base amount for 2011 is $13,006 or $35.63 (2012 is $13,314 or $36.38 per day. To figure your base amount if you are a calendar year taxpayer, multiply $35.63 by the number of
days in your period of foreign residence or presence, whichever applies, that are
within the tax year. Please note that beginning in 2006 the maximum foreign
housing exclusion can vary depending on which foreign country and city you
establish you tax residency.
You may exclude your housing amount from income to the extent it is from
employer-provided amounts. Employer-provided amounts are any amounts paid
to or for you by your employer, including your salary, housing reimbursements,
and the fair market value of pay given in the form of goods and services.
If you claim the exclusion, you cannot claim any credits or deductions related to
excluded income, including a credit or deduction for any foreign income tax paid
on the excluded income.
HOUSING DEDUCTION
If you are self-employed and your housing amount is not provided by or for an
employer, you can deduct it in arriving at your adjusted gross income. However,
the deduction is limited to the amount your foreign earned income for the tax year
is more than the excluded foreign earned income and housing amount.
FOREIGN HOUSING CARRYOVER
If you cannot deduct all of your housing amount in a tax year because of the limit,
you can carry over the unused part to the next year. You can deduct this
carryover to the extent the limit for that year (your foreign earned income minus
the foreign earned income and housing amount you exclude) is more than your
housing deduction for that year. You cannot carry over any remaining amount to
any future tax year.
Choosing the exclusion(s). You make separate choices to exclude foreign earned
income and/or to exclude or deduct your foreign housing amount. If you choose
to take both the foreign housing exclusion and the foreign earned income
exclusion, you must figure your foreign housing exclusion first. Your foreign
earned income exclusion is then limited to the smaller of (a) your annual
exclusion limit or (b) the excess of your foreign earned income over your foreign
housing exclusion.
Once you choose to exclude your foreign earned income or housing amount, that
choice remains in effect for that year and all future years unless you revoke it.
You can revoke your choice for any tax year. However, if you revoke your choice
for a tax year, you cannot claim the exclusion again for your next 5 tax years
without the approval of the IRS.
Exclusion of employer-provided meals and lodging. If as a condition of
employment you are required to live in a camp in a foreign country that is
provided by or for your employer, you can exclude the value of any meals and
lodging furnished to you, your spouse, and your dependents. For this exclusion,
a camp is lodging that is:
- Provided for your employer’s convenience because the place where you work is in a remote area where satisfactory housing is not available to you on the open market within a reasonable commuting distance,
- Located as close as practicable in the area where you work, and
- Provided in a common area or enclave that is not available to the public for lodging or accommodations and that normally houses at least 10 employees. Topics for: home leave, children’s education, moving expenses, supplementary medical payment are still under construction.
FOREIGN INCOME TAXES
A limited amount of the foreign income tax you pay can be credited against your U.S. tax
liability or deducted in figuring taxable income on your U.S. income tax return. It is usually
to your advantage to claim a credit for foreign taxes rather than to deduct them. A credit
reduces your U.S. tax liability, and any excess may be carried back and carried forward
to other years. A deduction only reduces your taxable income and may be taken only in
the current year. You must treat all foreign income taxes in the same way. You generally
cannot deduct some foreign income taxes and take a credit for others.
FOREIGN TAX CREDIT
If you choose to credit foreign taxes against your tax liability, complete Form 1116,
Foreign Tax Credit, (Individual, Estate, Trust, or Nonresident Alien Individual), and attach
it to your U.S. income tax return.
FOREIGN TAX LIMIT
Your credit cannot be more than the part of your U.S. income tax liability allocable to your
taxable income from sources outside the United States. So, if you have no U.S. income
tax liability, or if all your foreign income is exempt from U.S. tax, you will not be able to
claim a foreign tax credit.
If the foreign taxes you paid or incurred during the year exceed the limit on your credit for
the current year, you can carry back the unused foreign taxes as credits to 2 prior tax
years and then carry forward any remaining unused foreign taxes to 5 later tax years.
Foreign taxes paid on excluded income. You cannot claim a credit for foreign taxes paid
on amounts excluded from gross income under the foreign earned income exclusion or
the housing amount exclusion, discussed earlier.
FOREIGN TAX DEDUCTION
If you choose to deduct all foreign income taxes on your U.S. income tax return, itemize
the deduction on Schedule A (Form 1040). You cannot deduct foreign taxes paid on
income you exclude from your U.S. income tax return.
SELF-EMPLOYED PERSONS ABROAD
You must file a U.S. income tax return if you had $400 or more of net earnings from selfemployment, regardless of your age. You must pay self-employment tax on your self-employment income even if it is excludable as foreign earned income in figuring your income tax. Net earnings from self-employment include the income earned both in a foreign country and in the United States.
ESTIMATED TAXES WHILE ABROAD
If you are working abroad for a foreign employer, you may have to pay estimated tax, since not allforeign employers withhold U.S. tax from your wages.
Your estimated tax is the total of your estimated income tax and self-employment tax for the year
minus your expected withholding for the year.
When you estimate your gross income, do not include the income that you expect to exclude. You
may subtract from income your estimated housing deduction in figuring your estimated tax
liability. However, if the actual exclusion or deduction is less than you expected, you may be
subject to a penalty on the underpayment.
Use Form 1040 ES, Estimated Tax for Individuals, to estimate your tax. The requirements for
filing and paying estimated tax are generally the same as those you would follow if you were in
the United States.
When to file. If your tax year is the calendar year, the due date for filing your income tax return isusually April 15 of the following year.
US WITHHOLDING TAX
You may be able to have your employer discontinue withholding income tax from all or a part of
your wages. You can do this if you expect to qualify for the income exclusions under either the
bona fide residence test or the physical presence test.
Withholding from pension payments. U.S. payers of benefits from employer deferred
compensation plans (such as employer pension, annuity, or profit-sharing plans), individual
retirement plans, and commercial annuities generally must withhold income tax from the
payments or distributions. Withholding will not apply only if you choose exemption from
withholding. You cannot choose exemption unless you provide the payer of the benefits with a
correct taxpayer identification number and a residence address in the United States or a U.S.
possession or unless you certify to the payer that you are not a U.S. citizen or resident alien or
someone who left the United States to avoid tax.
For rules that apply to non periodic distributions from qualified employer plans and tax-sheltered
annuity plans get Publication 575, Pension and Annuity Income (Including Simplified General
Rule).
FILING EXTENSIONS WHILE ABROAD
If you are a U.S. citizen or resident and both your tax home and your abode are outside the
United States and Puerto Rico on the regular due date of your return, you are automatically
granted an extension usually to June 15 to file your return and pay any tax due. You do not have
to file a special form to receive this extension. You must, however, attach a statement to your tax
return when you file it showing that you are eligible for this automatic extension.
It may benefit you to file for an additional extension of time to file. You may benefit if, on the due date for filing, you have not yet met either the bona fide residence test or the physical presence test, but you expect to qualify after the automatic extension discussed above and have no tax liability. To file for an additional extension, send Form 2350, Application for Extension of Time To file U.S. Individual Income Tax Return, to the Internal Revenue Service Center in Philadelphia or to your local IRS representative. Send the form after the close of your tax year but before the end of the first extension. If an extension is granted, it will be to a date after you expect to meet the time requirements for the bona fide residence or physical presence test. You must attach the approved Form 2350 to your income tax return when you file it.
FOREIGN BANK and FINANCIAL ACCOUNTS
If you had any financial interest in, or signature or other authority over, a bank account, securities account, or other financial account in a foreign country at any time during the tax year, you may have to complete Treasury Department Form TD 90-22.1, Report of Foreign Bank and Financial Accounts, and file it with the Department of the Treasury, P.O. Box 32621, Detroit, MI 48232. You must file this form no matter where you live. You need not file this form if the combined assets in the account(s) are $10,000 or less during the entire year, or if the assets are with a U.S. military banking facility operated by a U.S. financial institution.
TAX AGREEMENTS FOR EXPATRIATES
There are a number of tax agreements that may affect the taxes of an expatriate. Some of these
are host country specific. Always check the country you live in to check tax status.
Tax Treaty Benefits
U.S. tax treaties or conventions with many foreign countries entitle U.S. residents to certain credits, deductions, exemptions and reduced foreign tax rates. This is a way to pay less tax to those host countries. For example, most tax treaties allow U.S. resident to exempt part or all of their income for personal services from the treaty (host) country’s income tax if they are in the treaty country for a limited number of days. In January and February of 1998 new treaties become effective with, South Africa, Thailand, Canada, Ireland, Switzerland, Austria and Turkey. You will have to check with the local Consulate for the text or other information.
Social Security Totalization Agreements
These countries have agreements to eliminate duplication of U.S. Social Security and social
insurance program of the host country:
Austria, Belgium, Canada, Finland, France, Germany, F.R., Greece, Ireland, Italy,
Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, United
Kingdom. If the country you are living in is not listed, send some e-mail to members of
congress. The wise use of these agreements saves employers money and strengthens the
benefits of employees.
Information Exchange Agreements
These countries have information sharing agreements with the United States:
Barbados, Bermuda, Colombia, Costa Rica, Dominican, Dominican Republic, Grenada,
Guyana, Honduras, Jamaica, Marshall Islands, Mexico, Peru, St. Lucia, Trinidad and
Tobago.
