Taxation of Americans Living Abroad

Disclaimer: The following “Taxation of Americans Living Abroad” material is for general information, not legal advice.

Source: IRS

Taxation of Americans Living Abroad

If you are a US citizen or a U.S. Green Card Holder; a U.S. person the Internal Revenue Code 7701(b), and live overseas, your worldwide income is subject to the U.S tax law regardless of where you earned it. You are also subject to all the U.S. international tax laws, including Report of Foreign Bank & Financial Accounts (FBAR), Foreign Account Tax Compliance Act (FATCA). Other rules could apply if entering the OVDP.

Foreign Earned Income Exclusion

Under the Foreign Earned Exclusion provided by the Section 911 of the Internal Revenue Code, if you qualify, you may be able exclude up to an amount of your overseas compensation that is adjusted annually for inflation as follows:

2021     $108,700

2022     $112,000

2023     $120,000

2024     $126,500

2025     $130,000

For example, not stay in the U.S. for more than 35 days in a calendar year, under the Foreign Earned Exclusion provided under the Section 911 of the Internal Revenue Code.  You may deduct certain foreign housing amounts, which can only be taken by timely filing the tax return. It is important to note that this exclusion does not apply to passive or un-earned income (see below). Neither does it waive the requirements of filing (FBAR) and (FATCA) (see above).

When to File ?

Your calendar year Form 1040 is generally due April 15 the of the following year. However, you are automatically granted a 2-month extension of time to file, if on the due date of your return, you live outside the U.S. and Puerto Rico and your tax home (defined above) is outside the U.S. and Puerto Rico. If you take this extension, you must attach a statement to your return explaining that you meet these two conditions. The automatic 2-month extension also applies to paying the tax. However, you will owe interest on any tax not paid by the regular due date of your return.

Where to File ?

If any of the following situations apply to you:

• You claim the foreign earned income exclusion;
• You claim the foreign housing exclusion or deduction; or,
• Your tax home is in a foreign country or countries throughout your period of bona fide residence or physical presence, whichever applies.

File your return using the appropriate address for your circumstances:

Requesting a refund, or no check or money order enclosed:
Department of the Treasury
Internal Revenue Service
Austin, TX 73301-0215
USA

Enclosing a check or money order:
Internal Revenue Service
P.O. Box 1303
Charlotte, NC 28201-1303
USA

Foreign Income Categories 

Generally, the foreign income may be classified to three categories;

• Earned Income, income includes;
  1. Salaries & wages;
  2. Other commissions;
  3. Bonuses;
  4. Professional fees; and,
  5. Tax tips: The exclusion applies to income tax only and not to social security, unless there is a totalization agreement, see http://www.zfcpa.com/blog/ustotalizationagreements x
• Un-earned Income, includes:
  1. Dividends;
  2. Interest;
  3. Capital gains;
  4. Gambling winnings;
  5. Alimony;
  6. Social security benefits; and
• Variable Income, may fall into either one of the above under the circumstances and includes:
  1.  Business income;
  2.  Royalties; and,
  3.  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 1st through December 31st, if you file a calendar year return); or,
• A U.S. resident alien who is a citizen or national of a country with which the U.S. 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^st through December 31st, 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.

 Note:  You do not automatically acquire bona fide resident status merely by living in a foreign country or countries for 1 year.

Physical Presence Test To meet this test, you must be a US 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 for IRS Form 2555. The 330 full days can be interrupted by periods when you are traveling over international waters or are otherwise not in a foreign country.  You may review IRS Publication 54 for more information and examples.

End of IRS material.

Zaher Fallahi, OFAC and Tax Attorney, CPA, is a Tax Controversy Attorney and represents taxpayers including Americans Living Abroad with the IRS Tax Resolution, Cryptocurrency Tax, Stolen Crypto Tax, Ponzi Investment Fraud Loss Tax Help, Offshore Accounts, Foreign Gifts and Foreign Inheritance.

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