Introduction
This article discusses in general terms some
provisions of the U.S. federal income tax law that apply
to U.S. citizens and resident aliens who live or work
abroad and who expect to receive income from foreign
sources.
As a U.S. citizen or resident alien, your worldwide
income generally is subject to U.S. income tax
regardless of where you are living. Also, you are
subject to the same income tax return filing
requirements that apply to U.S. citizens or residents
living in the United States.
However, several income tax benefits might apply if
you meet certain requirements while living abroad. You
may be able to exclude from your income a limited amount
of your foreign earned income. You also may be able
either to exclude or to deduct from gross income your
housing amount (defined later). To claim
these benefits, you must file a tax return and attach
Form 2555, Foreign Earned Income. If you are
claiming the foreign earned income exclusion only, you
may be able to use the shorter Form 2555-EZ, Foreign
Earned Income Exclusion, rather than Form 2555.
You may, on your U.S. return, be able to claim a tax
credit or an itemized deduction for the foreign income
taxes that you pay. Also, under tax treaties or
conventions that the United States has with many foreign
countries, you may be able to reduce your foreign tax
liability.
Publications 54, Tax Guide for U.S. Citizens and
Resident Aliens Abroad, 514, Foreign Tax Credit
for Individuals, and 901, U.S. Tax Treaties,
discuss in detail the treatment of your foreign income,
the foreign tax credit, and the general tax treaty
benefits available to you.
See How To Get Tax Help at the end of this
publication for information about getting publications
and forms.
Filing Information
The U.S. filing requirements for U.S. citizens and
resident aliens in foreign countries are generally the
same as those for citizens and residents living in the
United States.
Who must file. Your age, filing status,
gross income, and whether you can be claimed as a
dependent by another taxpayer determine whether you must
file a U.S. federal income tax return. To determine if
you meet the gross income requirement for filing
purposes, you must include all income you receive from
foreign sources as well as your U.S. income. This is
true even if:
- The income is paid in foreign money,
- The foreign country imposes an income tax on that
income, or
- The income is excludable under the foreign earned
income exclusion, discussed later.
Self-employed persons. You must
file a U.S. income tax return if you had $400 or more of
net earnings from self-employment, regardless of your
age. Net earnings from self-employment include the
income earned both in a foreign country and in the
United States.
You must pay self-employment tax on your
self-employment income even if it is earned in a foreign
country and is excludable as foreign earned income in
figuring your income tax.
When to file. If your tax year is
the calendar year, the due date for filing your income
tax return is usually April 15 of the following year.
Extensions of time to file. You are
automatically granted an extension to June 15 to file
your return and pay any tax due if you are a U.S.
citizen or resident, and on the regular due date of your
return:
- You are living outside of the United States and
Puerto Rico, and your main place of business or post
of duty is outside of the United States and Puerto
Rico, or
- You are in military or naval service on duty
outside the United States and Puerto Rico.
You must pay interest on any unpaid tax from the
regular due date to the date you pay the tax.
You do not have to file a special form to receive
this extension. Most individuals do file form 4868
though to assure there is no problem. You must, however, attach a statement to
your tax return explaining what situation qualified you
for the extension.
It may benefit you to file for an additional
extension of time to file. You may benefit if, on the
due date for filing, you have not yet met either the
bona fide residence test or the physical presence test,
but you expect to qualify after the automatic extension
discussed above. To obtain an additional extension, file
Form 2350, Application for Extension of Time To File
U.S. Individual Income Tax Return, with the
Internal Revenue Service Center in Philadelphia or your
local IRS representative. You must file Form 2350 after
the close of your tax year but before the end of the
first extension. If an additional extension is granted,
it will be to a date after you expect to meet the time
requirements for the bona fide residence or the physical
presence test.
Where to file. If any of the
following situations apply to you, you should file your
return with the Internal Revenue Service Center
designated by the IRS for expatriates.
- You claim the foreign earned income exclusion.
- You claim the foreign housing exclusion or
deduction.
- You claim the exclusion of income for bona fide
residents of American Samoa.
- You live in a foreign country or U.S. possession
and have no legal residence or principal place of
business in the United States.
All other taxpayers should see Publication 54 or the
instructions for Form 1040.
Foreign bank and financial accounts. If you
had any financial interest in, or signature or other
authority over, a bank account, securities account, or
other financial account in a foreign country at any time
during the tax year, you may have to complete Treasury
Department Form TD F 90-22.1, Report of Foreign Bank
and Financial Accounts, and file it with the
Department of the Treasury at the address listed on the
form. You need not file this form if the combined assets
in the account(s) are $10,000 or less during the entire
year, or if the assets are with a U.S. military banking
facility operated by a U.S. financial institution.
You can get Form TD F 90-22.1 from the offices listed
at the end of this publication or from the IRS Forms
Distribution Center, P.O. Box 25866, Richmond, VA
23286-8107.
Estate and gift taxes. Under certain
conditions, you may have to file a federal estate or
gift tax return. For more information, see Publication
950, Introduction to Estate and Gift Taxes.
Income Earned Abroad
You may qualify for an exclusion from tax of a
limited amount of income earned while working abroad.
However, you must file a tax return to claim it. In
general, foreign earned income is income received for
services you perform in a foreign country. You also may
be able to claim an exclusion or a deduction from gross
income for your reasonable housing costs that are over a
certain base amount. Generally, you will qualify for
these benefits if your tax home (defined
below) is in a foreign country, or
countries, throughout your period of bona fide foreign
residence or physical presence and you are one of the
following:
- 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, or
- A U.S. resident alien who is a citizen or national
of a country with which the United States 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,
or
- A U.S. citizen or a U.S. resident alien who is
physically present in a foreign country or countries
for at least 330 full days during any period of 12
consecutive months.
Tax home. Your tax home is the general area
of your main place of business, employment, or post of
duty where you are permanently or indefinitely engaged
to work. You are not considered to have a tax home in a
foreign country for any period during which your abode
is in the United States. However, being temporarily
present in the United States, or maintaining a dwelling
there, does not necessarily mean that your abode is in
the United States. For details, see Publication 54.
Foreign country. A foreign country, for this
purpose, means any territory under the sovereignty of a
government other than that of the United States,
including territorial waters (determined under U.S.
laws) and air space. A foreign country also includes the
seabed and subsoil of those submarine areas which are
adjacent to the territorial waters of the foreign
country and over which it has exclusive rights under
international law to explore and exploit natural
resources. For this purpose, U.S. possessions or
territories are not foreign countries.
Waiver of time requirements. You may not
have to meet the minimum time requirements for bona fide
residence or physical presence if you have to leave the
foreign country because war, civil unrest, or similar
adverse conditions in the country prevented you from
conducting normal business. You must, however, be able
to show that you reasonably could have expected to meet
the minimum time requirements if the adverse conditions
had not occurred. See Publication 54 for more
information on foreign countries that individuals have
had to leave due to these conditions.
Travel restrictions. If you violate U.S.
travel restrictions, you will not be treated as being a
bona fide resident of, or physically present in, a
foreign country for any day during which you are present
in a country in violation of the restrictions. (These
restrictions generally prohibit U.S. citizens and
residents from engaging in transactions related to
travel to, from, or within certain countries.) Also,
income that you earn from sources within such a country
for services performed during a period of travel
restrictions does not qualify as foreign earned income.
Housing expenses that you incur within that country (or
outside that country for housing your spouse or
dependents) while you are in violation of travel
restrictions cannot be included in figuring your foreign
housing amount.
As of April 15, 2003, these travel restrictions apply
to Cuba, Libya, and Iraq.
Exclusion of foreign earned income. If your
tax home is in a foreign country and you meet either the
bona fide residence test or the physical presence test,
you can choose to exclude from gross income a limited
amount of your foreign earned income. Your income must
be for services performed in a foreign country during
your period of foreign residence or presence, whichever
applies. You cannot, however, exclude the pay you
receive as an employee of the U.S. Government or its
agencies.
Credits and deductions. If you
claim the exclusion, you cannot claim any credits or
deductions that are related to the excluded income.
Thus, you cannot claim a foreign tax credit or deduction
for any foreign income tax paid on the excluded income.
Nor can you claim the earned income credit if you claim
the exclusion. Also, for IRA purposes,
the excluded income is not considered compensation and,
for figuring deductible contributions when you are
covered by an employer retirement plan, the excluded
income is included in your modified adjusted gross
income.
Amount excludable. If your tax home
is in a foreign country and you qualify under either the
bona fide residence test or physical presence test for
the entire tax year, you can exclude up to $97,600 for
2013 and lesser amounts for earlier tax years. The
IRS adjusts the exclusion amount yearly for inflation
and it has gone up significantly over the years.
If you qualify under either test for only part of the
year, you must reduce ratably the maximum amount based
on the number of days within the tax year you qualified
under one of the two tests.
Housing amount. If your tax home is in a
foreign country and you meet either the bona fide
residence test or the physical presence test, you may be
able to claim an exclusion or a deduction from gross
income for a housing amount.
A housing amount is the excess, if
any, of your allowable housing expenses for the tax year
over a base amount. Allowable housing
expenses are the reasonable expenses (such as rent,
utilities other than telephone charges, and real and
personal property insurance) paid or incurred during the
tax year by you, or on your behalf, for your foreign
housing and that of your spouse and dependents if they
lived with you. You can include the rental value of
housing provided by your employer in return for your
services. You can also include the allowable housing
expenses of a second foreign household for your spouse
and dependents if they did not live with you because of
dangerous, unhealthy, or otherwise adverse living
conditions at your tax home. Allowable housing expenses
do not include the cost of home purchase or other
capital items, wages of domestic servants, or deductible
interest and taxes.
The base amount is 16% of the annual
salary of a GS-14, step 1, U.S. Government employee,
figured on a daily basis, times the number of days
during the year that you meet the bona fide residence
test or the physical presence test. The annual salary is
determined on January 1 of the year in which your tax
year begins. You figure the base amount on Form 2555.
Exclusion. You can exclude (up to
the limits) your entire housing amount from income if it
is considered paid for with employer-provided amounts.
Employer-provided amounts are any amounts paid to or for
you by your employer, including your salary, housing
reimbursements, and the fair market value of pay given
in the form of goods and services. If you have no
self-employment income, your entire housing amount is
considered paid for with employer-provided amounts.
If you claim the exclusion, you cannot claim any
credits or deductions related to excluded income,
including a credit or deduction for any foreign income
tax paid on the excluded income.
Deduction. If you are self-employed
and your housing amount is not provided by an employer,
you can deduct it in arriving at your adjusted gross
income. However, the deduction cannot be more than your
foreign earned income for the tax year minus the total
of your excluded foreign earned income plus your housing
exclusion.
Carryover. If you cannot deduct all
of your housing amount in a tax year because of the
limit, you can carry over the unused part to the
following year only. If you cannot deduct it in the
following year, you cannot carry it over to any other
year. You deduct the carryover in figuring adjusted
gross income. The amount of carryover you can deduct is
limited to your foreign earned income for the year of
the carryover minus the total of your foreign earned
income exclusion, housing exclusion, and housing
deduction for that year.
Choosing the exclusion(s). You make separate
choices to exclude foreign earned income and/or to
exclude or deduct your foreign housing amount. If you
choose to take both the foreign housing exclusion and
the foreign earned income exclusion, you must figure
your foreign housing exclusion first. Your foreign
earned income exclusion is then limited to the smaller
of (a) your annual exclusion limit or (b) the excess of
your foreign earned income over your foreign housing
exclusion.
Once you choose to exclude your foreign earned income
or housing amount, that choice remains in effect for
that year and all future years unless you revoke it. You
can revoke your choice for any tax year. However, if you
revoke your choice for a tax year, you cannot claim the
exclusion again for your next 5 tax years without the
approval of the IRS. For more information on revoking
the exclusion, see chapter 4 of Publication 54.
Married couples. If both you and
your spouse are eligible for the exclusion(s), see
chapter 4 of Publication 54.
Exclusion of employer-provided meals and lodging.
If as a condition of employment you are required to live
in a camp in a foreign country that is provided by or
for your employer, you can exclude the value of any
meals and lodging furnished to you, your spouse, and
your dependents. For this exclusion, a camp is lodging
that is:
- Provided for your employer's convenience because
the place where you work is in a remote area where
satisfactory housing is not available to you on the
open market within a reasonable commuting distance,
- Located as close as practicable in the area where
you work, and
- Provided in a common area or enclave that is not
available to the public for lodging or accommodations
and that normally houses at least 10 employees.
Tax Withholding
and Estimated Tax
Generally, you must pay U.S. tax on the income earned
abroad in the same way you pay the tax on income earned
in the United States. If you are an employee of a U.S.
company, your employer probably withholds income tax
from your pay. If income tax is not withheld or if not
enough tax is withheld, you might have to pay estimated
tax.
Withholding tax. You may be able to have
your employer discontinue withholding income tax from
all or a part of your wages. You can do this if you
expect to qualify for the income exclusions under either
the bona fide residence test or the physical presence
test. See Publication 54 for information.
Withholding from pension payments.
U.S. payers of benefits from employer deferred
compensation plans (such as employer pension, annuity,
or profit-sharing plans), individual retirement plans,
and commercial annuities generally must withhold income
tax from the payments or distributions. Withholding will
apply unless you choose exemption from withholding. You
cannot choose exemption unless you provide the payer of
the benefits with a residence address in the United
States or a U.S. possession or unless you certify to the
payer that you are not a U.S. citizen or resident alien
or someone who left the United States to avoid tax.
For rules that apply to nonperiodic distributions
from qualified employer plans and tax-sheltered annuity
plans, get Publication 575, Pension and Annuity
Income.
Estimated tax. If you are working abroad for
a foreign employer, you may have to pay estimated tax,
since foreign employers generally do not withhold U.S.
tax from your wages.
Your estimated tax is the total of your estimated
income tax and self-employment tax for the year minus
your expected withholding for the year.
When you estimate your gross income, do not include
the income that you expect to exclude. You can subtract
from income your estimated housing deduction in figuring
your estimated tax liability. However, if the actual
exclusion or deduction is less than you expected, you
may be subject to a penalty on the underpayment.
Use Form 1040-ES, Estimated Tax for Individuals,
to estimate your tax. The requirements for filing and
paying estimated tax are generally the same as those you
would follow if you were in the United States.
Foreign Income Taxes
In some cases, foreign income tax you pay can be
credited against your U.S. tax liability or deducted in
figuring taxable income on your U.S. income tax return.
It is usually to your advantage to claim a credit for
foreign taxes rather than to deduct them. A credit
reduces your U.S. tax liability, and any excess can be
carried back and carried forward to other years. A
deduction only reduces your taxable income and can be
taken only in the current year. You must treat all
foreign income taxes in the same way. You generally
cannot deduct some foreign income taxes and take a
credit for others.
Tax credit. If you choose to credit foreign
taxes against your tax liability, you generally must
complete Form 1116, Foreign Tax Credit (Individual,
Estate, Trust, or Nonresident Alien Individual),
and attach it to your U.S. income tax return. Do not
include the foreign taxes paid or accrued as withheld
income taxes on Form 1040.
Limit. Your credit cannot be more
than the part of your U.S. income tax liability
allocable to your taxable income from sources outside
the United States. So, if you have no U.S. income tax
liability, or if all your foreign income is excludable,
you will not be able to claim a foreign tax credit.
If the foreign taxes you paid or incurred during the
year exceed the limit on your credit for the current
year, you can carry back the unused foreign taxes as
credits to the 2 previous tax years and then carry
forward any remaining unused foreign taxes to the next 5
tax years.
You will not be subject to this limit and may be able to
claim the credit without using Form 1116 if the
following requirements are met.
- You are an individual.
- Your only foreign source income for the tax year
is passive income (dividends, interest, royalties,
etc.) that is reported to you on a payee statement
(such as a Form 1099-DIV or 1099-INT).
- Your qualified foreign taxes for the tax year are
not more than $300 ($600 if filing a joint return) and
are reported on a payee statement.
- You elect this procedure for the tax year.
If you make this election, you cannot carryback or
carryover any unused foreign tax to or from this tax
year.
Foreign taxes paid on excluded income.
You cannot claim a credit for foreign taxes paid on
amounts excluded from gross income under the foreign
earned income exclusion or the housing amount exclusion,
discussed earlier.
Deduction. If you choose to deduct all
foreign income taxes on your U.S. income tax return,
itemize the deduction on Schedule A (Form 1040). You
cannot deduct foreign taxes paid on income you exclude
from your U.S. income tax return.
More information. The foreign tax credit and
deduction, their limits, and the carryback and carryover
provisions are discussed in detail in Publication 514.
Tax Treaty Benefits
U.S. tax treaties or conventions with many foreign
countries entitle U.S. residents to certain credits,
deductions, exemptions, and reduced foreign tax rates.
In this way, you may be able to pay less tax to those
countries.
For example, most tax treaties allow U.S. residents
to exempt part or all of their income for personal
services from the treaty country's income tax if they
are in the treaty country for a limited number of days.
Treaties also generally provide U.S. students,
teachers, and trainees with special exemptions from the
foreign treaty country's income tax. Publication 901
contains detailed information on tax treaties and tells
you where you can get copies of them.
To Get Expert Tax Help, planning and return
preparation from a U.S. C.P.A./Attorney with over 32
years experience with expatriate and foreign taxation by contacting us now.
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