Taxation of Americans living abroad
If you are a US citizen or a US Green Card Holder, a US person the Internal Revenue Code 7701, and live overseas, you are taxed on your worldwide income regardless where you earned it.
Furthermore, you are subject to all the US international tax laws including Report of Foreign Bank & Financial Accounts (FBAR), see here. Foreign Account Tax Compliance Act (FATCA) see here and other applicable tax laws.
The good news is that you may be able exclude up to an amount of your overseas compensation that is adjusted annually for inflation ($99,200 for 2014 and $100,800 for 2015), if you otherwise qualify. For example not live in the US more than 35 days in a calendar year.
This is according to the Foreign Earned Exclusion provided under the Section 911 of the Internal Revenue Code. You may deduct certain foreign housing amounts. This exclusion can only be taken by timely (June 15, but tax liabilities must be paid by April 15) filing the tax return. It is important to note that this exclusion doesn’t apply to un-earned income (see below).
Neither does it waive the requirements for filing the FBAR and FATCA (see above). Generally, the foreign income may be classified to three categories; (a) Earned Income, (b) Un-earned Income, and (c) Variable Income.
Earned income includes salaries & wages, commissions, bonuses, professional fees and tips. Unearned income includes dividends, interest, capital gains, gambling winnings, alimony, social security benefits, and annuities.
Variable income may fall into either one of these categories under the circumstances and includes business income, royalties and rents. Generally, the exclusion may be taken under one of the following tests:
Bona Fide Residence Test
To meet this test, 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 (January 1–December 31, if you file a calendar year return)
- A U.S. resident alien who is a citizen or national of a country with which the US 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 (January 1–December 31, if you file a calendar year return). Whether you are a bona fide resident of a foreign country depends on your intention about the length and nature of your stay. Evidence of your intention may be your words and acts.
Physical Presence Test
To meet this test, you must be a U.S. citizen or resident alien who is physically present in a foreign country, or countries, for at least 330 full days during any period of 12 months in a row. A full day means the 24-hour period that starts at midnight.
To figure 330 full days, add all separate periods you were present in a foreign country during the 12-month period shown on line 16. The 330 full days can be interrupted by periods when you are traveling over international waters or are otherwise not in a foreign country. See Pub. 54 for more information and examples.
Note: Under certain circumstances, you may be exempt for application of the Affordable Car Act.
Zaher Fallahi, Tax attorney and a CPA, advises Americans living abroad with tax preparation, tax planning, IRS representation, and resolving tax controversy with respect to unreported foreign bank accounts and foreign trusts; FBAR, FATCA and OVDP. We may be reached at (310) 719-1040 (Los Angeles), (714) 546-4272 (Orange County), or e-mail to: [email protected]