09/02/2019
Taxation of Americans Living Overseas
Taxation of Americans Living Abroad (2019 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. 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 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 eligible. For example not to stay in the US more than 35 days in a calendar year, with certain exceptions.
In addition, you may deduct certain foreign housing expenses. 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 not 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 and 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. For more information, review IRS Publication 54.
Zaher Fallahi, CPA, Tax Attorney, 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 nationewide.
Zaher Fallahi, Esq., has been rated 10 out of 10 by Avvo Rated 10 of 10 .
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The US has tax agreements with certain countries for the purpose of avoiding double taxation of income regarding social security taxes, called “Totalization Agreements”. These agreements must be taken into consideration when determining if an alien is subject to the U.S. Social Security/Medicare...
