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Taxation of Americans Living Abroad

Posted by: Zaher Fallahi
Posted On: Jan 27, 2019

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. You are also subject to all the US international tax laws, including Report of Foreign Bank & Financial Accounts ( FBAR), Foreign Account Tax Compliance Act ( FATCA), among others.

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 ($102,100 for 2017 and $103,900 for 2018), 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 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).

 

When to File?

Your 2018 calendar year Form 1040 is generally due April 15, 2019. However, you are automatically granted a 2-month extension of time to file (to June 17, 2019, for a 2018) if, on the due date of your return, you live outside the US and Puerto Rico and your tax home (defined above) is outside the US 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:

(1)You claim the foreign earned income exclusion,

(2) You claim the foreign housing exclusion or deduction, or

(3) 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;

(a) Earned Income;

(b) Un-earned Income; and,

(c) Variable Income.

 

(a) 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

 

(b) Unearned income

Unearned income includes:

(1) Dividends;

(2) Interest;

(3) Capital gains;

(4) Gambling winnings;

(5) Alimony;

(6) Social security benefits; and

(7) Annuities.

 

(c)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 1st through December 31st, 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 1st 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.

Line 16. The 12-month period on which the physical presence test is based must include 365 days, part of which must be in 2018. The dates may begin or end in a calendar year other than 2018.

 

Zaher Fallahi, Tax Attorney, CPA, licensed in California and a Washington D. C., advises clients with international tax matters, represents taxpayers with tax audits, including undisclosed foreign accounts before the Treasury throughout the United States.

Zaher Fallahi, Esq., has been rated 10 out of 10 by Avvo Rated 10 of 10 .

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