Answers to 15 tax-related questions we receive by taxpayers living, or considering living abroad important to know.
1. I am a U.S. citizen living and working abroad. What is the exclusion amount?
You may qualify to exclude from income up to $108,700 of your foreign earnings. You can exclude or deduct certain foreign housing amounts. Your employer does not have to withhold U.S. income taxes from wages you earn abroad if it is reasonable to believe that you will exclude them from income under the foreign earned income exclusion or the foreign housing exclusion.
2. Where, When, and How 1) When are U.S. income tax returns due?
Generally, for calendar year taxpayers, U.S. income tax returns are due on April 15. If you are a U.S. citizen or resident and both your tax home and your abode are outside the United States and Puerto Rico on the regular due date, an automatic extension is granted to June 15 for filing the return. Interest will be charged on any tax due, as shown on the return, from April 15.
3. My entire income qualifies for the foreign earned income exclusion.
Must I file a tax return? Generally, yes.
Every U.S. citizen or resident who receives income must file a U.S. income tax return unless total income without regard to the foreign earned income exclusion is below an amount based on filing status.
4. I was sent abroad by my company in November of last year. I plan to secure an extension of time on Form 2350 to file my tax return for last year because I expect to qualify for the foreign earned income exclusion under the physical presence test. If my company recalls me to the United States before the end of the qualifying period and I find I will not qualify for the exclusion, how and when should I file my return?
If your regular filing date has passed, you should file a return, Form 1040 (Form 1040 or 1040-SR for 2021), as soon as possible for last year. Include a statement with this return noting that you have returned to the United States and won’t qualify for the foreign earned income exclusion.
5. I am a U.S. citizen and have no taxable income from the United States, but I have substantial income from a foreign source. Am I required to file a U.S. income tax return? Yes.
All U.S. citizens and resident aliens are subject to U.S. tax on their worldwide income. If you paid taxes to a foreign government on income from sources outside the United States, you may be able to claim a foreign tax credit against your U.S. income tax liability for the foreign taxes paid. Form 1116 is used to figure the allowable credit.
6. Due to illness, I returned to the United States before I completed my qualifying period to claim the foreign earned income exclusion. Can I figure the exclusion for the period I resided abroad? No.
You aren’t entitled to any exclusion of foreign earned income because you did not complete your qualifying period under either the bona fide residence test or physical presence test. If you paid foreign tax on the income earned abroad, you may be able to claim that tax as a deduction or as a credit against your U.S. tax.
7. Will a check payable in foreign currency be acceptable in payment of my U.S. tax?
Generally, only U.S. currency is acceptable for payment of income tax.
8. I have met the test for physical presence in a foreign country and am filing returns for 2 years. Must I file a separate Form 2555 with each return? Yes.
9. To meet the qualification of “an uninterrupted period that includes an entire tax year,” do I have to be physically present in a foreign country for the entire year? No.
“Uninterrupted” refers to the bona fide residence proper and not to the physical presence of the individual. During the period of bona fide residence in a foreign country, even during the first full year, you can leave the country for brief and temporary trips back to the United States or elsewhere for vacation, or even for business. To preserve your status as a bona fide resident of a foreign country, you must have a clear intention of returning from those trips, without unreasonable delay, to your foreign residence.
10. My company pays my foreign income tax on my foreign earnings. Is this taxable compensation? Yes.
The amount is compensation for services performed. The tax paid by your company should be reported on Form 1040 or 1040-SR, line 1, and on Form 2555, Part IV, line 22f.
11. My U.S. employer pays my salary into my U.S. bank account. Is this income considered earned in the United States or is it considered foreign earned income?
If you performed the services to earn this salary outside the United States, your salary is considered earned abroad. It does not matter that you are paid by a U.S. employer or that your salary is deposited in a U.S. bank account in the United States. The source of salary, wages, commissions, and other personal service income is the place where you perform the services
12. How can I get my employer to stop withholding federal income taxes from wages while I am overseas and eligible for the foreign earned income exclusion?
File a statement in duplicate with your employer stating that withholding should be reduced because you meet the bona fide residence test or physical presence test. Also, see the following question.
13. I am claiming the foreign earned income exclusion. Can I take the additional child tax credit? No.
You can’t take the additional child tax credit if you claim either the foreign earned income or foreign housing exclusion, or the foreign housing deduction.
14. I am a U.S. citizen married to a nonresident alien. Can I qualify to use the head of household tax rates? Yes.
Although your nonresident alien spouse cannot qualify you as a head of household, you may qualify if you maintain a household for a qualifying child or other relative.
If your spouse was a nonresident alien at any time during the year and you do not choose to treat your nonresident alien spouse as a resident alien, then you are treated as unmarried for head of household purposes. You must have another qualifying person and meet the other tests to be eligible to file as head of household.
It may be advantageous to choose to treat your nonresident alien spouse as a U.S. resident and file a joint income tax return. Once you make the choice, however, you must report the worldwide income of both yourself and your spouse.
15. Can a resident alien of the United States qualify for an exclusion or deduction under the bona fide residence test or the physical presence test?
Resident aliens of the United States can qualify for the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction if they meet the requirements of the physical presence test.
Resident aliens who are citizens or nationals of a country with which the United States has an income tax treaty in effect can also qualify under the bona fide residence test.
Summary
Expat tax planning and tax return preparation can be complex, and errors expensive. If you have questions, we encourage you to make the effort to get your questions answered correctly beforehand, and gain insight on facts essential for your to know you may not know to ask if you are self-preparing your tax return.
Definitely consider engaging a tax professional experienced in Expat tax law to assist you with planning, and return preparation long before your tax return is due.
Cobalt PacWest | CPAs & Advisors
Natalie C. Papagni, CPA
Principal | Tax Strategist
4225 Executive Square # 600
La Jolla, CA 92037
3000 El Camino Real Suite 200
Palo Alto, CA 94306
858.247.0939 | 650.930.9562
npapagni@cobaltpacwestadvisors.com