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Taxation of Americans Living Abroad, 2017 Filing Season

Posted by: Zaher Fallahi
Posted On: Feb 05, 2017

Taxation of Americans Living Abroad 2017 Filing Season

If you are a US citizen or a US Green Card Holder, a US person the Internal Revenue Code 7701(b), and live overseas, you are taxed on your worldwide income regardless of 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 under the Foreign Earned Exclusion provided by the Section 911of the Internal Revenue Code, you may be able exclude up to an amount of your overseas compensation that is adjusted annually for inflation ($99,200 for 2014, $100,800 for 2015, $101,300 for 2016 and $102,100 for 2017), if you otherwise qualify. For example not to stay in the US more than 35 days in a calendar year, subject to exceptions.


Additionally, you may deduct certain foreign housing amounts. Generally, this exclusion can only be claimed if timely (June 15 due date if present overseas, but tax liabilities must be paid by April 15) filing the tax return.  Other rules could apply if entering the IRS OVDP (click here OVDP).


It is important to note that this exclusion applies to earned income only and 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 

Earned income includes;

1) Salaries & wages;

2) Other commissions;

3) Bonuses;

4) Professionals fees; and,

5) Tips.


Not: 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


Unearned income

Unearned income includes:

1) Dividends;

2) Interest;

3) Capital gains;

4) Gambling winnings;

5) Alimony;

6) Social security benefits; and

7) Annuities.


Variable income

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:

1) 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), or


2) 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.


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 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, CPA, advises Americans living abroad with tax preparation, tax planning, IRS representation, undisclosed foreign accounts (FBAR, FATCA and OVDP) and foreign trusts.  Telephone: (310) 719-1040 (Los Angeles), (714) 546-4272 (Orange County), or e-mail: taxattorney@zfcpa.com