US taxes for US Expat in Abu Dhabi
November 15th, 2010 | 
Author:
I am a US citizen who is going to work in Abu Dhabi. What tax ramification should I expect?
It's a little bit of an open question :)
But.
Review this information:
US Taxes guide for Americans living abroad
If you meet the requirements of the foreign earned income exclusion, then you will file form 2555 with your tax returns which will allow you to earn the first $91.5K tax free.
You may also want to think about form 673, Exemption from withholding, and form 2350 - Application for Extension of Time
To File U.S. Income Tax Return For U.S. Citizens and Resident Aliens Abroad Who Expect To Qualify for Special Tax Treatment.
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- Expat Taxes
Expat Taxes
I have not filed in 25 years…Will I go to jail?
If you are proactive, file your income taxes now and pay any related penalties and interest you will not go to jail.
Remember, You only have to file for those years where your earned income is more than $8,950 ($400 if you are self employed). You will also have to file under other less common situations, For a full list please visit: http://ftp.irs.gov/individuals/article/0,,id=96623,00.html or e-mail us with your specific question.Posted in: Expat Taxes
I am a civilian working overseas in direct support of the US armed forces; do I qualify for combat pay income exclusion or any kind of extension of deadlines?
A. While you do not qualify for the combat zone military pay exclusion, as this exclusion only applies to members of the US Armed Forces, you do qualify for an extension for the filing and paying of your income taxes. This extension gives you 180 days after your last day in the combat zone. During this period, no interest or penalties attributable to the extension period will be assessed.
Posted in: Expat Taxes
I am self employed, does I qualify for the foreign earned income exclusion?
Yes, for federal income taxes – but you are responsible for medicare and social security taxes (And entitled to such benefits upon require
Posted in: Expat Taxes
I own my own business overseas, which is a legal entity in my country of residence. Do I qualify for the foreign earned income exclusion, and do I have to pay social security and medicare taxes?
You qualify for the exclusion from the 3 taxes. However, you must file an informational tax return for any foreign companies you own (Form 5471). Form 5471 is used by certain U.S. citizens and residents who are officers, directors, or shareholders in certain foreign corporations.
Posted in: Expat Taxes
Due to a medical emergency, I had to come to the US and because of this time I do not meet the 30 days for the physical presence test. is there an exception under medical emergencies?
No. The only exception for the 330 day requirement in the physical presence test is when you must leave the foreign country due to war or civil unrest.
Posted in: Expat Taxes
Am I taxed on the market value of the residence that my employer provides for me while overseas?
Unless living in those quarters is mandated by your employer for business reasons, it is indeed taxable income (Though it could be part of your foreign earned income and housing exclusion).
Posted in: Expat Taxes
I have to pay US taxes, but I do not have US Dollars and my home country currency is not fully convertible. How can I comply with my duty to pay taxes?
If you face the issue of blocked income due to foreign currency restrictions in your home country, you could postpone the reporting and payment until the currency becomes unblocked, or pay with funds you may have in the US. If you decide to postpone. you would file certain information and no penalties or interest would accrue.
Posted in: Expat Taxes
I have not filed in more than 1 year. Do I lose my right to the foreign earned income exclusion?
No! (But if you wait until the IRS comes looking for you, you will lose the right to the exclusion)
Posted in: Expat Taxes
I was only a couple of days short of meeting the 330 days for the physical presence test! What luck! Is there anything I can do to avoid this large tax bill?
We can file an extension on your behalf, and wait to file until you have met the 330 day requirement (Yes, even if you are “using” days from the next fiscal year). It get’s a little complicated, so we would be happy to help you.
Posted in: Expat Taxes
What is one of the most popular mistakes by taxpayers living abroad?
Not reporting your bank accounts abroad. This applies to any person that has a financial interest in, signature authority or other authority over any financial account (s) in a foreign country and the aggregate value of these account(s)
exceeds $10,000 at any time
during the calendar year. Not reporting can make you subject to civil and criminal penalties, and penalties of up to $100,000.Posted in: Expat Taxes
I am a US citizen and I have been working in Mexico for more than 5 years as a chemical engineer. I was not planning on staying this long in a foreign country but I have gotten married here and I plan to live here for many more years. Since I am not in the US, doesn’t that make paying federal taxes voluntary?
You are not exempt from paying taxes. You are taxed on the basis of your citizenship and not your residency. Americans are taxed differently from citizens in most countries. However, there are special exemptions that you may look into. There are credits for taxes that you pay to the country where you reside as well as an $87,600 foreign earned income exclusion. Take note that this exclusion is adjusted for inflation annually and is estimated to be $91,400 in 2010. In addition, there is no statute of limitations on tax collections if you have never filed your income tax return. Obligations grow each year that they are not paid. To report income, you have to first file the right IRS form – the Form 2555 (Foreign Earned Income Form) or Form 2555-EZ, in addition to the IRS Form 1040. Form 2555 is for those who own houses and/or are self-employed. Form 2555-EZ is for those whose income is less than $85,700 and will not be applying for housing and self-employment deductions. There still is an April 15th deadline but the IRS allows an automatic two-month extension to file the forms. However, be advised that penalties and interest charges will accrue.
Posted in: Expat Taxes
Started my job in New Zealand as an interior designer in July 2008 and went back to Miami in December 2008 to sell my car and my house there. It took me awhile and I resumed my job in Auckland in July 2009. Am I entitled to the foreign earned income exclusion?
Since you’ve been going back and forth, the length of time that you’ve been spent in a foreign country does not amount to a year.
To meet the bona fide resident test for a foreign country, you must have lived there for an uninterrupted period that includes an entire tax year; that is from January 1 through December 31. You must also make this country as your tax home. You fail to meet this test. Your purpose in the country is to work there and not to live there permanently. You don’t want to run the risk of being audited and then losing the exclusion.
To pass the physical presence test, you have to be in a foreign country for at least 330 days in a 365-day period and have your tax home in that country. You would then be entitled to the foreign earned income exclusion of $87,600 (2008) . However, since you haven’t been in a foreign country for that period, the exclusion would be prorated. When you prepare your 2009 tax return, you can use a different period for the test, if you prefer. You can also file for an extension to pass the physical presence test to be able to meet the requirement and then get the full exclusion.
According to Section 911(d)(1) of the US Code, a qualified individual is an individual whose tax home is in a foreign country and who is (A) a citizen of the United States and establishes to the satisfaction of the Secretary of the Treasury that the individual has been a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire taxable year, or (B) a citizen or resident of the United States who, during any period of 12 consecutive months, is present in a foreign country or countries during at least 330 full days.Posted in: Expat Taxes
I had been a marketing executive based in Yemen since January 2008. The Shiite-Sunni clashes have been terrible for business. I came back to New York on May 2, 2008. There is no indication that hostilities will stop in the near future. Does the US government recognize the difficulties that expats in war-torn countries are experiencing?
The US government does indeed take into account the fact that civil unrest can interrupt your bona fide or physical presence test eligibility. Accordingly, we can file with your tax return a waiver of time requirements.
You can claim the tax benefits on foreign earned income exclusion (IRS Form 2555) but only for the number of days you were a bona fide resident of, or physically present in, the foreign country. If you can claim either of the exclusions or the housing deduction because of the waiver of time requirements, we can attach a statement to your return explaining that you expected to meet the applicable time requirement, but was unable to do so due to the conditions in the foreign country.
For 2008, the Secretary of the Treasury, in consultation with the Secretary of State, has determined that war, civil unrest, or similar adverse conditions precluded the normal conduct of business in Yemen starting after April 7, 2008. According to Rev. Proc. 2009-22, Section 2.05, a person who left one of these troubled countries on its list on or after the specified departure date “will be treated as a qualified individual with respect to the period during which that individual was present in, or was a bona fide resident of, such foreign country, if the individual establishes a reasonable expectation of meeting the requirements of § 911(d) but for those conditions
Posted in: Expat Taxes
What is this tax form called the Foreign Bank Account Report? When do I submit the form? I’m new to Brazil and I intend to live here for at least the next 3 years. As early as now, I want to make sure that I comply with all tax regulations in the US and Brazil.
You are required to fill out the Foreign Bank Account Report (Form TD F 90-22.1, commonly referred to as FBAR) to disclose accounts you hold in foreign banks and other financial institutions if your total balance of all accounts is $10,000 or greater at any point during the year. The form has to be submitted with the US Treasury Department by June 30, 2009. You will have to provide information on all your financial accounts held in a foreign country including bank accounts (checking and savings), investment accounts, mutual funds, retirement accounts, and securities and other brokerage accounts.
The instructions for filling out Form TD F 90-22.1, state that every US citizen or resident alien, partnership, corporation, estate, or trust must file TD F 90-22.1 if they have “financial interest in or signature authority, or other authority over any financial accounts, including bank, securities, or other types of financial accounts in a foreign country, if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year.”
It’s very important that your report must be received by the due date (June 30). Electronic filing is not allowed and forms have to be mailed to a specified Detroit address rather than your IRS service center.
Penalties will be assessed for failing to file this report and as they’re quite harsh, we recommend that you make the effort even if you missed the filing deadline. For any person found to be willfully violating the requirements to file, there is a penalty of up to $250,000 and/or up to 5 years in prison (31 CFR 5322a penalty). If the non-filing is related to a pattern of any illegal activity involving more than $100,000 in a 12-month period, the penalty is up to $500,000 and/or up to 10 years in prison for any person (31 CFR 5322b penalty). For providing false, misleading, fictitious, or fraudulent statements on the form, the person can face a fine or up to 5 years in prison or up to 8 years in prison if the false information involves domestic or foreign terrorism (18 CFR 1001 penalty).
There are exceptions to this rule. You do not need to report accounts held at US military banking facilities or if your banks are located in Guam, Puerto Rico, and the US Virgin Islands. There’s also no need to report US-based accounts held by a branch or division of a foreign bank.
Posted in: Expat Taxes
I’m a New Yorker by heart but I love the life in South Africa. I have a small business here selling digital accessories and have never been remiss in paying taxes to the US. Call it ignorance if you want, but the first time I’ve heard of the Foreign Bank Account Report was last month. I heard that tough action is being threatened against those who don’t file the form. What do I do now?
I’m assuming that you reported and paid tax on all of your taxable income for the previous years. If you don’t have sufficient time to get the information required for filing the FBAR on or before June 30, 2009, you should file the delinquent FBAR report as soon as possible. Attach a statement to explain why the report was filed late. Send a copy of this delinquent FBAR, along with a copy of the 2008 tax return, by Sept. 23, 2009, to the Philadelphia Offshore Identification Unit. Provided all your taxable income was reported, you will not be imposed a penalty for your failure to file on time.
On June 24, 2009, the IRS offered the following advice:
Taxpayers who reported and paid tax on all their 2008 taxable income, but only recently learned of their FBAR filing obligation and have insufficient time to gather the necessary information to complete the FBAR, should file the delinquent FBAR report according to the instructions and attach a statement explaining why the report is filed late. Send it to the address below:
Additionally, send a copy of the delinquent FBAR, together with a copy of the 2008 tax return, by September 23, 2009, to the Philadelphia Offshore Identification Unit, at the following address:
In this situation, the IRS will not impose a penalty for the failure to file the FBAR.
Additionally, if all 2008 taxable income with respect to a foreign financial account is timely reported and a United States person only recently learned they have a 2008 FBAR obligation and there is insufficient time to gather the necessary information to complete the FBAR, the United States person may follow the procedures set forth above and no penalty will be imposed.
For 2008 tax returns due after September 23, 2009, the tax return does not need to accompany the 2008 FBAR.
Posted in: Expat Taxes
I’m an expat living in Paris. This is the first year that I will be required to pay taxes as a US citizen living in a foreign country. My employer has been generous enough to pay many of my expenses here, including the rent, utilities, education of my 2 kids, as well as insurance and taxes associated with my living here. Can I use these for exemptions? What’s the maximum limit?
What you are referring to is the Foreign Earned Income Exclusion. The amount of salary that you can exclude per year is limited to your actual wages or $87,600 (in 2009, the exclusion for 2010 is $91,400 and it is adjusted every year)– whichever is less. However, if you don’t meet the time requirements to qualify for a maximum exclusion, you can claim for a prorated exclusion.
Please see the information related to the requirements to be eligible for the foreign earned income exclusion here:
Foreign Earned Income
.The following expenses qualify for the exclusion: rent, Fair rental value of housing provided by your employer, repairs, utilities other than telephone, real property and personal property insurance (homeowners & renters insurance), occupancy taxes, nonrefundable security deposits or lease payments, furniture rental, residential parking fees, tax equalization payments paid by your employer, education expenses for your dependent children. Non-qualifying expenses include lavish expenses, deductible interest and taxes, cost of buying property, domestic labor, pay television, home improvements, purchased furniture, and depreciation of property or improvements.
Posted in: Expat Taxes
I have a colleague who made a voluntary disclosure of his tax obligations. He was asked to pay a 20% offshore penalty. I am against payment of this penalty; I think that it’s uncalled for. What can I do?
The 20% penalty is far less than the penalty if you do not follow the amnesty program, and is not negotiable for the most part.
However, according to the New Foreign Bank Account Report (FBAR) FAQs issued by the IRS on June 25, 2009, If any part of the penalty structure is unacceptable to a taxpayer, that case will follow the standard audit process. All relevant years and issues will be subject to a complete examination. At the conclusion of the examination, all applicable penalties (including information return and FBAR penalties) will be imposed.
The IRS added that these penalties may be greater than the 20% penalty initially calculated.
You do not have any options if you want to get up to date with your responsibilities as a US taxpayer.
Posted in: Expat Taxes
In Chile where I’ve held a job as a chef for 3 years now, I have been religiously paying taxes. This year, I made some bad investments and so I’ll be late in filing the tax return. Which penalties incur interest? From what date does the interest accrue?
If you’re referring to accuracy-related or delinquency penalties, interest is assessed from the due date of the tax return. For all other penalties, interest is computed from the date of assessment of the penalty.
The failure-to-file penalty assesses a 5% charge on the amount due from the year’s income, up to a maximum amount of 25%. The failure-to-pay penalty equals one-half of 1% of the amount owed per month, maxing out at 25% as well. You will be charged interest on an unpaid balance at the prevailing rate. You may also have to pay a penalty for not paying sufficient estimated taxes.
Keep in mind that the penalty for not filing at all is higher than the penalty for not paying on time and that by paying a partial amount, you can limit the penalty and interest charges.
Posted in: Expat Taxes
I’ve asked several of my peers but their advice vary from not being liable for anything to being criminally liable and having the threat of imprisonment on my neck. I’ve always been wary of government proceedings and I’ve been putting off going to the IRS and coming in under voluntary disclosure. Can you tell me: what’s the worst that could happen? Will I be facing criminal charges on top of the civil liabilities I know I’m sure to be slapped with? If I do decide not to come forward, what price do I pay?
Don’t wait for the IRS to find you. When they do, they could file criminal charges related to tax evasion (26 U.S.C. Sec. 7201), filing a false return (26 U.S.C. 7206(1)) or failure to file an income tax return (26 U.S.C. 7203). You would also be facing criminal charges if you failed to file an FBAR or if you filed a false FBAR under 31 U.S.C. 5322.
If convicted of tax evasion, you could get a prison term of up to 5 years and a fine of up to $250,000. Filing a false return gives a slightly lighter sentence of up to 3 years and a fine of up to $250,000. Failing to file a tax return gives a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR gives the harshest punishment, with a prison term of up to 10 years and penalties of up to $500,000.
“Civil and criminal penalties, including in certain circumstances a fine of not more than $500,000 and imprisonment of not more than five years, are provided for failure to file a report, supply information, and for filing a false or fraudulent report.” (From the Privacy Act Notice on Form 90-22.1)
Posted in: Expat Taxes
I already pay taxes in the Philippines where I’ve been staying for the past 4 years. What can you tell me about foreign tax credit?
You can claim a credit for taxes that you’ve paid in a foreign country. Not included in this computation are the taxes paid on any income, which has been excluded from US taxation using the foreign earned income exclusion or the foreign housing exclusion. A tax credit is more valuable than a deduction since a tax credit reduces your liability on a dollar-for-dollar basis. Get your total foreign-source income and divide it by your total worldwide income. This resulting percentage, when multiplied with your US tax liability, must not exceed your foreign tax credit.
If your foreign tax credit is higher than your limit, you may be able to carry the excess credit over to the next year or you may even apply it to one of the previous two years.
Taxes paid to foreign countries are deductible in the same manner a US state and local taxes on Schedule A (Form 1040). Alternatively, taxpayers can choose to claim foreign income tax as a credit by filling Form 1116 annually. Mostly, foreign tax credit saves more income tax than a deduction.
Not all types of taxes qualify for the foreign tax credit. The IRS says that four qualifications have to be met. The tax should be imposed on you (and not the employer); the tax must be owed or already paid by you; the tax has to be legal; and the tax is based on income that you earned.
Posted in: Expat Taxes
I would like to know if someone could comment on my situation. I am self-employed and have a contract with a company to move to Brazil for at least 1 year. All business related expenses will be reimbursed to me and also they will provide a car for me in Brazil. I have concerns over how to prepare for taxes on both sides – US and Brazil. I do not have the company providing someone to take care of all of this for me as I an considered an independent contractor. Does anyone have any contacts they could recommend me discuss this situation over with so that I can prepare and not be surprised with more taxes than I planned for? Thanks for any comments.
Hello,
First, the fact that you will be moving to Brazil will likely have you qualify for the foreign earned income exclusion. While this will allow you to earn your first $91,500 income tax free, you will still be subject to self employment taxes (15.3% on your net income).
Given that the company will cover all business related expenses, your net income will be your gross income as well – so multiply the total amount you will be paid by 15.3% and that will be the self employment tax due. If your earnings will exceed $91,500, then the excess of 91,500 will be taxed at that tax bracket. If you are single, the amount will be:
2010
of the Over But Not
OverPay + % on
Excessamount
over—$0— $8,375 $0 10 % $0 8,375— 34,000 837.50 15 8,375 34,000— 82,400 4,681.25 25 34,000 82,400— 171,850 16,781.25 28 82,400 171,850— 373,650 41,827.25 33 171,850 373,650— 108,421.25 35 373,650 While your situation will need to be analyzed properly, the above implies that your tax returns will consist at least of forms:
- 1040
- 2555 To claim the foreign earned income exclusion
- 1116 To claim a foreign tax credit to offset US taxes with taxes paid to Brazil, for any taxes resulting from income in excess of the exclusion.
We can of course help you with your tax returns. Please visit
http://taxplannercpa.com/incometax-online-quickquote.php
for more information on our services – you can even get an instant quote for preparing your returns!Posted in: Expat Taxes
Which is more tax beneficial (to pay less taxes): Start a company in my foreign country, get foreign country contracts and get paid in foreign currency as a U.S. citizen or Start a company in the U.S., get foreign contracts and get paid in dollars as a U.S. citizen?
Start a foreign corporation, of which you will be an employee and earn a salary, and conduct your business through that foreign corporation.
This way, your wages are not subject to self employment income of 15.3%. Of course, you will not be contributing into the social security system which plays against your retirement – but there are plenty of planning opportunities.
Your tax return will now also include form 5471, informational return on controlled foreign corporations, which will bring a slight increase on your tax prep fees. You will also likely have to report your foreign bank accounts on form TDF 90 221 (FBAR).
In short you will earn the first $91,400 (2009) absolutely tax free.
Posted in: Expat Taxes
Foreign earned income exclusion Proration
I have always filed my tax periods as 01 Jan. – 31 Dec. This year my contract is going to end in the first week of November. If I were to return to the U.S. will I lose all of my foreign income tax exclusion? I have been inside the U.S. for about 10 days total this year. Last year I paid about 35,000 dollars in taxes and I am wondering how much higher I should expect it to be this year. This year I expect to make about 195,000 which is about the same as I made last year.
As it relates to your situation, If I understand correctly you have been out of the US for more than 2 years, and you simply are returning in November this year. In this case, you can still qualify for the Foreign earned income exclusion, which for 2010 is $91,500. It will be prorated, so assuming your qualifying period is 11/30/09 to 10/31/10, you can exclude up to $83,875. Anything in excess of that will be taxable – 111,125 in your case.
I unfortunately cannot tell you how much you will pay, because there are many other factors to take into consideration. If you wanted, however a rough estimate, you could add 1/12 to what you paid last year.
Posted in: Expat Taxes
I worked in two different foreign countries during tax year. I earned $38,000 in UK and paid tax of approx. 10k. I then worked in Brazil and earned $165,000. I paid no tax in Brazil. Can I choose to report Brazil income only on form 2555 and UK income only on Form 1116? Or do I have to report all foreign income on 2555 thereby eliminating all of my UK foreign tax paid credit?
Great Question!!!
You can opt out of the foreign earned income in order to maximize the foreign tax credit or other credits for that matter.
Just be sure to run the numbers properly, as there would need to be more facts to this in order for it to be the right strategy.
Posted in: Expat Taxes
I am a US citizen who is going to work in Abu Dhabi. What tax ramification should I expect?
It’s a little bit of an open question
But.
Review this information:
US Taxes
guide for Americans living abroadIf you meet the requirements of the foreign earned income exclusion, then you will file form 2555 with your tax returns which will allow you to earn the first $91.5K tax free.
You may also want to think about form 673, Exemption from withholding, and form 2350 – Application for Extension of Time
To File U.S. Income Tax Return For U.S. Citizens and Resident Aliens Abroad Who Expect To Qualify for Special Tax Treatment.Posted in: Expat Taxes
My husband and I are both US citizens and MA residents, but are living in Mexico with our children for one school year (August 2009-June2011). We are also Mexican citizens, as we grew up here, though have long established our domicile in MA. I believe we do not qualify for the bona fide residence as we will not be in Mexico for one full tax year. But, we would like to know whether we would qualify for the foreign earned income exclusion, AND whether we could deduce certain expenses in Mexico. Question 1: Can we claim the foreign earned income if my husband is self-employed and works from Mexico but for a US company? Question 2: Would we be able to deduce the following expenses in Mexico?: a. Housing expenses: We live in a “borrowed” house in Mexico. We have an informal agreement in which we do not pay rent per se, but are required to pay for the maintenance expenses of the house and utilities instead. These expenses are high given that it is a large house. We pay a fixed monthly amount to independent contractors to maintain the property. We also pay for any additional costs related to adapting the house for our job purposes (e.g., working from home and adapting a home office). b. Housing question: Would it be advisable to have a formal, notarized agreement regarding our housing situation (paying for maintenance instead of rent)? Would this help us deduce housing expenses? c. Other expenses: We are paying for our children’s education in Mexico, car insurance in Mexico and the US (we drove our car); home office expenses, Mexican health insurance, etc. Can we deduce these as our expenses even though we work from Mexico this school year? Thank you so much for your help with these questions!
Hello.
Well, hopefully you qualify under the
physical presence test
.Specific answers to your questions:
1. Yes, but remember the self employment income will be subject to self employment taxes of 15.3%. See
Self employment taxes and the foreign earned income exclusion
.
2. a. No. Living free might even create taxable income in the form of free housing. Adapting the house, and any related expenses to working from home would indeed be a business deduction.
2. b I believe it would be better indeed, as your rent expense would be more clear and less confusing to the IRS when you calculate the rent expense deductible as a business expense (Home office).
2.c Children’s education not deductible. Car expenses deductible only to the extent it is used for business. Home office expenses indeed deductible on Schedule C. Health insurance deductible as self employed health insurance . All deductible even though incurred in Mexico.If you have any further questions ,please let me know!
Ed
Posted in: Expat Taxes
I am American with dual citizenship in the country that I have been living in for the past 6 years. I am a permanent resident of this country and have my own business in this country. I pay into the tax system. Do I still need to file for taxes in the United States? I haven’t up until this point and am concerned that I have to.
Hello,
Indeed, as an American citizen you are required to file your tax returns each year in which your income exceeds certain tresholds. They change each year, and as general guidance you must file a tax return for each year where your income exceeded $8,000 if employed, or $800 if self employed.
However, you may take advantage of the
foreign earned income exclusion
which would allow you to earn the first $91,500 federal tax free. This number also changes yearly (
Historical foreign earned income exclusion amounts
). This applies only to earned income (One generated by your personal services such as wages, participation in a partnership, or self employment income).Self employment net income would still be subject to self employment taxes of 15.3%, unless you can claim a tax treaty benefit. (
Self Employment and the foreign earned income exclusion
).In short, you should file your tax returns as non filing is more of a problem than you would like to deal with (Non filing is a criminal offense and you risk losing the right to the foreign earned income exclusion). We can help you with your tax returns – find out instantly the fee for preparing your returns: http://taxplannercpa.com/incometax-online-quickquote.php
Posted in: Expat Taxes
I am a US citizen working on a contract position in Iraq that started in early April of 2010. After receiving an offer letter I decided to take a vacation out of the country before orientation and deployment. I understand the physical presence test except for one condition. Can I use the six weeks I was on vacation overseas between jobs without any income that was before my start date and arrival in my new country of employment? That would give me a date range of February 2010-Feburary 2011 and a significant exclusion bonus.
Hello,
The physical presence test states you must be physically present in a foreign country or countries for 330 days in a 12 month period. Accordingly, if your vacation overseas between jobs did not include time in the USA it can certainly be used towards your physical presence test (Regardless if you were on vacation or working).
If you’d like, you can find a complete explanation of the
physical presence test
in our post: Expanding Upon the Physical Presence Test.Posted in: Expat Taxes
Hello, Currently I’m a USA citizen but moving to New Zealand in February with full NZ citizenship status. I’m looking for answers on the tax implications? I discovered that the first $91,400 of overseas earnings is income tax free. What happens to earnings beyond that? Will I be taxed by both countries? For example if I earn $100k do I pay USA taxes on the difference and am I taxed similar to a USA citizen earning $8,600k? Also what happens to my motgaged property if i elect to rent to a third party? Thanks
Hello!
Indeed, your best friend will be the
foreign earned income exclusion
. Once your income exceeds the amount ($91,500 for 2010), you will need to rely on the foreign tax credit – which allows you to use taxes paid to a foreign government as a dollar for dollar reduction in your US taxes. You can also claim treaty based positions, to avoid double taxation. So no, with these 3 elements (Foreign earned income exclusion, Foreign tax credit, tax treaty) you should not experience double taxation – although you will be taxed at the highest rate of the countries.
When taxed in the US, following your example , your tax bracket will be calculated using the $100,000 – not the difference of 8,600 – but the rate will indeed be applied only to the 8,600.Once you rent your property it will be like any other rental income for US taxpayers. Taxed on Schedule E.
Posted in: Expat Taxes
I am working in HK with $90,000 salaries. I took a business trip to the US for 6 days. I also attended training program held in the US for 20 days. Should I treat 26-day salary as U.S. source income when I stay in the U.S for business purpose?
Yes.
On you
form 2555
, You should report income earned during this trip – which will ultimately be taxed as US sourced income and reduce your
foreign earned income exclusion
.This is a common issue for consultants. If you are a widget-maker, then calculating the income you earned on the trip is easy. Simply claculate how many widgets you finished while in the US and multiply times your pay rate. A consultant does not have it that easy – checking emails, meeting potential clients, thinking! None of these can be easily quantified. Simply prorate your salary using the days in the year you work. (i.e. 90,000 / 260 days ).
Posted in: Expat Taxes
I am working in HK with $90,000 salaries. I took a business trip to the US for 6 days. I also attended training program held in the US for 20 days. Should I treat 26-day salary as U.S. source income when I stay in the U.S for business purpose?
Yes you should.
It is not very straightforward to calculate what the income you derived in those days would be, some people argue that no income was earned while in the US. Based on the rules set forth by the IRS, the examples above would indeed mean earned income.
Prorate your salary by dividing your annual income over the working days in a year (Usually 240) and then calculate your US earned income to use in form 2555 which will impact your foreign earned income exclusion.
Posted in: Expat Taxes
We are Americans resident in Italy for many years and recently started an Italian company. I’m having a hard time deciding whether the income my husband receives in the form of commissions in the US should be paid to him in the name of the company. We don’t have a US company bank account, only an Italian one. If the income goes to him as an individual in the US, is there any way for us to treat it as income of the Italian company? On the other hand, if it is paid to us in our Italian account, our Italian adviser is saying there should be VAT on it (20%!), which the company paying the commission will never agree to. Not sure how best to proceed and with the end of the year fast approaching I have to decide where the money should be paid and to whom. Help!
It is not clear whether the commission income belongs to the company or to your husband. If it belongs to the company, by all means your husband can receive the commission in the name of the company – but you need to report it properly on your company’s financials.
The Italian taxes that will derive from this transaction are indeed something you should discuss with your Italian advisor. As it relates to commission income, business net profits, or salaries from a foreign corporation – you should definitely consult a US CPA. Feel free to contact us for a no charge initial consultation.
Also see this article for some useful information:
http://taxplannercpa.com/WP/foreign-earned-income-exclusion/schedule-c-and-the-foreign-earned-income-exclusion/
(Commission Income in its simplest form would be Sch C, although not set in stone)
Posted in: Expat Taxes
I have a friend that is a US citizen living in the Philippines working as a consultant to the Asian Development Bank. Would his consultant fees be subject to US self-employment tax? The fees are being deposited into a US bank account.
Indeed.
Unless he can be considered a statutory employee ( See http://www.irs.gov/businesses/small/article/0,,id=99921,00.html ), he is considered a self employed individual and subject to US Self employment taxes.
Another exception would exist if he is paying into the Philippine’s social security system. Thanks to the tax treaty he may be able to avoid US taxation (All tax treaties are different, and I would have to review that particular one to tell you exactly. You can find a copy of the treaty here: http://www.irs.gov/businesses/international/article/0,,id=169605,00.html )You can also review the information here for other ideas:
http://taxplannercpa.com/WP/category/self-employment/
Posted in: Expat Taxes
I am looking into purchasing property in St Kitts which offers a Economic Cititzenship if the property is valued over 350,000 USD. I have a few questions about this: 1) If I become a citizen of both the US and St kitts do I still owe income tax to the US on income earned in the US? Do i get to exempt the first ~90k? 2) I own stocks and bonds. I get a 1099-div for the interest and dividends on these securities. If I become a dual citizen…will I still owe taxes on these types of investments? 3) I also own rental property in the USA. Will I owe federal tax on this too? Thanks in advance.
Dear Sir,
1. If you become a dual citizen, you are still bound by US law and subject to be taxed on your worldwide income. However, the
Foreign Earned Income exclusion
may indeed apply (Excluding your first $91,500 from federal tax), as well as the
foreign tax credit
and perhaps other benefits to aleviate any possible double taxation.2. Yes. These are not considered earned income and hence not eligible for the foreign earned income exclusion. You will owe US taxes on those amounts.
3. Yes.
Possible reading material you may be interested in:
- Foreign tax treaties
- Expatriation (But keep in mind it is considered a criminal offense to expatriate just for the purpose of avoiding US Taxes).You should of course consider engaging the help of qualified professionals to evaluate your situation thoroughly. With proper planning, your US Tax burden can be minimized. Feel free to contact us here:
http://taxplannercpa.com/contactus.php
Posted in: Expat Taxes
I have dual citizenship (US/Greece) and have relocated to Greece since 2000. I have been working since and have never filed Tax Returns since then. Does it matter that I have a Greek Social Security ID?
Hello,
Even if you are a dual citizen you must file a US tax return every year where you meet the filing thresholds (Varies by year but to give you an idea if your gross income exceeds $8,000 or $400 if self employed).
There is indeed a totalization agreement between the USA and Greece – so you will not find yourself paying into both social security systems.
Ed
Posted in: Expat Taxes
Hi, How can a foreign (non-US) corporation open a US bank account? Any ideas on that? Could a foreign corporation use a trust account to collect its receivables?
A non US corporation can easily set up a bank account in the US as long as you have a good relationship with the banker, who will perform a thorough due diligence on the nature of your business.
You should find a bank that is familiar with dealing with foreign corporations – usually the smaller banks. Or you can work through a professional in the US such as a CPA firm that can help you by intermediating with the bank (We can do that for our clients).
I think a foreign corporation could use a trust to collect your receivables – but this is far from the best option.
A business structure such as yours should be carefully analyzed. We can help you with this matter – contact us if you would like a quote.Posted in: Expat Taxes
Similar to the person above moving to New Zealand, I am a US citizen moving to Brazil in March. I am exploring two options at the moment. a) Work for a company based in Brazil for a salary of 155k and b) start my own company.For a) I understand that I will be able to claim foreign earned income exclusion up to ~91000. Brazil’s highest tax rate is 27.5%, similar to the US’s 28% for this income amount. Does this mean that I will be taxed on all income in Brazil at a rate of 27.5% and then taxed again on $64,000 at a rate of 28%? or is the 64,000 taxed at the 25% rate (the US rate for 64,000 of income). Or am i not taxed at all? Brazil does not have a tax treaty with the US.Also if i were to move on a date so as not to qualify for the earned income exclusion (ie not being able to show that i’ve lived in the country for 330 days come tax time), does that mean I do not get the benefit for the first (potentially) 329 days living abroad and have to wait until the following year? Thanks!
Thank you for your question.
a) You will be taxed on the income in excess of the exclusion ($155k-$91.5 = $63.5) at the corresponding tax rate. Let’s assume for this example the 28%. However, you will be able to claim the foreign tax credit for any taxes already paid to Brazil. In short, if the Brazilian tax rate is 27.5% and the US rate is 28%, you will pay 27.5% to Brazil and 0.5% to the US. See the
foreign tax credit
explanation.Regarding moving in the middle of the year, the foreign earned income exclusion can be prorated. See http://taxplannercpa.com/WP/foreign-earned-income-exclusion/basics-of-the-foreign-earned-income-exclusion/
Posted in: Expat Taxes
I am going to be working in a foreign country that will charge me 15% tax rate on my earning. I will be living in that country for less than 330 days. Once back in the U.S. Am I still going to be subject to the 15.3% employment taxes or only .3% (15.3-15) employment tax? Looking forward to your response. alain
If you will not meet the foreign earned income exclusion, you will need to evaluate how to claim those foreign taxes paid – as a business deduction on your schedule C, an itemized deduction on Schedule A – or using the foreign tax credit.
Yes, you will still be subject to self employment tax for Schedule C income.Posted in: Expat Taxes
My husband worked in Iraq as a civilian from September of 2009 until August of 2010. We filed our 2009 taxes as usual- because he had not yet met the physical presence requirements. Now for our taxes this year do we have to break down the qualifying days for each year, and file a 2010 return and an ammended 2009 return? Or is there a way to figure it all in our 2010 taxes. Others my husband worked with said they treated it all as one year, but I am not sure how this would be done. Also, my husband lived and worked on a base- there was not a town or other facilities near by so he lived in the same quarters and used the mess hall as the military members and other civilians in his location. How is this figured, if it all, in the costs of lodging or the housing deduction/exclusion? Thank you for your time and help.
Hello,
For 2009, if you meet the foreign earned income exclusion gidelines, you can go back and ammend it – it is the only way to get the exclusion for that year. No such thing as lumping it into 2010 (Now if you earned a bonus in 2010 for work performed in 2009 that would be a different story, but not your case).
Regarding paid housing, meals and similar. If they are provided for the benefit of the employer it does not constitute taxable income to your husband.
Housing provided by an employer is not considered taxable income when it meets 3 criteria (IRC 119(c)):
• First, the lodging must be provided for the convenience of the employer because the place where the employee’s services are performed is in a remote area where satisfactory housing is unavailable.
• Second, the location of the camp must be as near as practicable to the place where the employee’s services are performed.
• Third, the lodging must be provided in a common area, not open to the public, which normally accommodates 10 or more employees.
This raiseds an issue because “… an employee who works for a U.S. military contractor on a foreign military base cannot exclude from income the value of lodging provided by his or her employer, as the lodging is not considered to be on the employer’s business premises (P.M. Middleton, TC Memo. 2008-150).14”. However,if you carefully review the the Tax Court memo referenced there, it is clear that in the case of those civilian contractors for the military, housing did not meet the 3 exclusions mentioned above. In your case you need to see if the 3 elements are clearly met.Remember that 1. As a civilian working in direct support of the armed forces in a combat zone, you are eligible for special filing and payment deadlines. Specifically, Afghanistan was declared a combat zone in executive order 13239, 2001-2 CB 632 on December 12 2001, and you may beeligible for the mentioned deadline extensions under the Internal Revenue Code section 7508 – Time for performing certain acts postponed by reason of service in combat zone or contingency operation.
Posted in: Expat Taxes
I am thinking of doing a 2 week stint in UAE. Do I have to pay taxes on income earned there, or do I still get the 91.5K exemption? I am currently a US citizen living in the states.
If you are only in UAE for 2 weeks you cannot claim the foreign earned income exclusion, and will have to pay taxes on that income. See http://taxplannercpa.com/WP/foreign-earned-income-exclusion/basics-of-the-foreign-earned-income-exclusion/
Posted in: Expat Taxes
I have worked overseas from Jan 2006-Jan 2010 and handled my taxes on a calendar year basis for the physical presence exclusion. This year, I have been out of work from May 2010 until now, and will be returning overseas Sept 2011 for one year. My tax year will be Sept 2011-Sept 2012 so my questions are: Will I be able to prorate the portion of this year (approx 110 days) that I will be out of the country on my taxes for this year (2011) or will I not be eligible for the exclusion until AFTER the full 365 day period has passed?
Hello,
You can indeed have the exclusion prorated based on the above facts.
The physical presence test states that you should be physically present in a foreign country or countries for 330 days in any 12 month period. This 12 month period does not have to be January – December. In your case it could be September 2011 – September 2012. This would give you roughly 120 days in this period that fall within the calendar year. Your foreign earned income exclusion would then be (120/365)*92900 = The lesser of 30,542 or your foreign earned income.
Since the qualifying period ends after the time fo file (June 15) you should request and extension using form 2350.
Best!
Ed
Posted in: Expat Taxes
I have been living and working in Afghanistan on a project granted to a State Department prime contractor since January 31st 2009. During my first year here I made sure that I qualified for the physical non-presence test and non-residency. I spent less than 30 days in the US from 1/31/09 – 1/30/10. What happened th is year is that I had to go home for two months for a wedding and to buy my house. Do I now have to pay taxes on my entire income for the time span of 1/31/10 – 1/31/11 or can I prorate and only pay taxes on the income that I earned during the time that exceeds the 33 day period?
You are looking at a matter of finding the best window for the physical presence test in 2010. If the 2 months that you were in the USA were in the middle of the year, you will end up forfeiting a large portion of the foreign earned income exclusion, but yes you can still take advantage of some of it.
For example, if you were in the USA in July and August, your 2010 physical presence test window could be from June 30 2009 to June 30 2010 – all other factors to your advantage you could claim 50% of the exclusion in 2010.
The closer to the beggining or the end of the year that you were in the US, the larger portion of the foreign earned income exclusion you will be able to claim.
Remember we have an online
physical presence test calculator
!
EdPosted in: Expat Taxes
If you are a civilian contractor working for the Dept of Defense on an Air Force base in the UK, do you pay US taxes or UK taxes?
I unfortunately cannot say with Authority that no tax implications are due to the UK.
With the US you must report your entire income, but you will likely qualify for the
foreign earned income exclusion
allowing you to earn the first $92,900 tax free.In the event you had to tax duties with the UK, rest assured that you would not be double taxes thanks to the US/UK Tax treaty and the
foreign tax credit
.Posted in: Expat Taxes
My husband (US citizen) has lived in the Netherlands since 1980 and has always been self-employed. He had no idea about the tax filing/ FBAR requirement until 4 days ago. He earns way under the foreign exclusion limit and is completely covered by social security/ medicare in the Netherlands, so he shouldn’t owe any tax. We’re currently having 6 tax returns prepared and will send off all the FBAR forms, but are really worried we’ll still be slammed with a massive fine. Is there any chance we’ll escape being fined, given that this was an honest oversight and he didn’t owe any tax anyway? Thank you!
While the law permits the IRS/Treasury to impose penalties in a situation like yours, The IRS has been mostly focusing on taxpayers that had a clear intent to evade taxes.
The IRS has offered guidance that clearly states they are not interested in pursuing taxpayers who did not have a criminal intent, and simply were not fully aware of the FBAR filing requirement. To see this communication see our articles on
FBAR
http://taxplannercpa.com/WP/fbar/what-is-fbar-foreign-bank-account-reporting/
and specifically Question 17 here: http://www.irs.gov/businesses/international/article/0,,id=235699,00.htm
In your particular case, tax returns were not filed so you do not meet that definition exactly – but I believe the underlying factors are the same and my guess is that your filing the late returns and paying the taxes, penalties and interest if any, will be the end of this chapter for you.
Posted in: Expat Taxes
I am a US citizen that has lived in a foreign country for 25 years. For the past 7 years I have not had an income. My spouse is the income producer and he is not a US citizen. I have not filed taxes since I have lived here. When I was working here, I never made more than the foreign exclusion limit. As I currently (and for the past 7 years) do not have an income, am I still required to file a tax return every year?
Hello,
You are only required to file a tax return if your gross income exceeds certain levels. If you have had no income, then no tax return is needed – See table 1 here:
http://www.irs.gov/publications/p501/ar01.html#en_US_2010_publink1000220675
When you do indeed have income, even if below the
foreign earned income exclusion
amounts you must still file a tax return.Lastly, I would caution you to keep in mind
FBAR
filing requirements.Posted in: Expat Taxes
My employer is overseas, and I even have a residency visa on my passport that shows I am a resident of that country. My company recently sent me on an assignment to the US that could be as long as one year. I left 7 days before meeting the physical presence test and five months before completing the jan-dec BFR test. I have been overseas since June 2010, but had to return to the US for part of July and all of August, then left the US again on September 2010 and did not return to the US until July 21, 2011. Is there anything I can do to reduce my tax liability? Also, I will be returning overseas in the next four or six months.
Dear Sir,
It unfortunately does not sound like there is much hope in terms of the foreign earned income exclusion – although there are other areas we could explore to reduce your tax liability.
I would suggest:
- Use the
Physical Presence test calculator
, so that based on your exact dates you know whether you qualify or not.
- Consider engaging our services – we will find the most advantageous tax position. Obtain a quote for our services here:
http://www.taxplannercpa.com/incometax-online-quickquote.php
Ed
Posted in: Expat Taxes
I am a US citizen in Iraq and my current contract started on Feb. 22, 2011. Am I correct in saying that I must spend 330 days out of the US between Feb. 22,2011 and Feb. 21, 2012 to qualify for the Foreign Earned Income Exclusion?
That is correct!
Use our online
physical presence test calculator
to run some scenarios!Ed
Posted in: Expat Taxes
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Posted in Foreign Earned Income Exclusion
