The United States is one of the few governments that tries to tax its citizens, no matter where in the world they live. Yet for years, expatriate Americans simply didn’t file returns, certain they were under the radar and faced few consequences for not filing. All of this has recently come to a halt, as the government is desperately seeking more revenue and many overseas taxpayers, who haven’t filed their returns for years, have received notices from the IRS reminding them not to be forgotten in America.
The silver lining in this cloud is that the US Congress has given the expat (and reluctant) taxpayer two weapons to help defend against the greed of the IRS, Forms 2555 and 1116. For those who actually live in abroad, the 2555 is the big gun. in the armory, since it allows a direct exclusion of certain income under certain conditions. Of course, it wouldn’t be US tax law if it were easy to understand, so I’ve included here an emphatic guide to IRS Form 2555 that does NOT.
How Form 2555 Helps You
In essence, Form 2555 means that the first $91,000 of income (for 2010) you earned while living abroad as a resident of a foreign country is subtracted from your US income in calculating your taxes. For U.S. citizens living abroad who earn the vast majority of their income through work but are not business magnates, professional athletes, or investment bankers, this can result in your income tax return USA is a mere formality with no money owed. “So Tyler,” you ask, “I don’t make more than $91,000 and I’m sure I don’t owe anything, why should I spend the time and money it would take to file the return?” I admit that it seems unfair, but I must warn you that if you don’t file the return, the IRS may compensate you, and it will not be in your favor!
The traps of not declaring
- The statute of limitations never runs out! Except in the case of tax fraud or tax evasion, the IRS can only audit a tax return three years after the filing date. If you don’t file them, they can come back forever.
- The IRS can whitewash a return that may be completely wrong or just include information that is detrimental to you. For example, they will include income without compensation expenses or capital gains without showing any basis in the sale.
- The IRS is a petty son of a bitch as a debtor and can garnish social security benefits or retirement plan income to pay back taxes that you probably wouldn’t have even owed if you had just filed.
Additional Benefits to Form 2555
The $91,000 is per person, so if you and your spouse both work, you will both file the form. In addition, Congress is aware that many US corporations provide housing allowances for expatriate workers (who must then be included in income on their W-2) and has therefore added an exclusion for expatriate worker allowances. housing adding to the existing $91K. The trick is that the IRS determines the maximum amount of the exclusion based on the cost of living in the area in which you live. If, for example, you live in Japan and your employer sends you to Tokyo, you get an allowance of $295.62 per day for a total of $107,900 per year. On the other hand, if you are sent to humble little Gifu, the maximum allowance you can exclude is $29,200. The complete table is available in the instructions for Form 2555 and makes for fascinating reading; especially if you’re about to be posted to Moscow, Russia, and want to know how the cost of living compares to your current position in Doha, Qatar. Plus, it’s great tax planning for expats employed by US corporations; your HR person should claim your wages as housing allowance up to the cap and then all that follows is wages.
Form 1116 plays Robin in the Form 2555 Batman
If you’re a high roller and have used up your $91,000 exclusion plus potentially up to $107,900 in housing allowance, then you might think you owe your old Uncle Sam a piece of the pot. Not so fast, if you are a tax resident of a foreign country then you also owe tax to your host country. This is where Form 1116 comes in. Basically, it gives you a dollar-for-dollar tax credit for taxes paid to foreign governments. Of course, being the US tax code, there have to be about ten thousand restrictions on why you actually get the credit, so check the instructions first.
Am I eligible to file Form 2555?
To be eligible to file Form 2555, you must clear two hurdles: first, your tax residence is in a foreign country, and second, you must be a bona fide resident of that country or have had a physical presence in a country or countries. outside of the United States
The tax domicile is a foreign country
Your tax domicile is the country or primary jurisdiction in which you conduct your business or employment. Therefore, it would stand to reason that you could only have one tax address at any given time, and to qualify for Form 2555, this tax address must have been outside the United States for at least part of the tax period you are filing. for.
Proof of bona fide resident
Once you’ve established that your tax residence was a foreign country for at least part of the year you’re filing, then you need to move on to see if you were a bona fide resident or if you meet the physical presence test. As a general rule, if you had only one foreign country as your tax residence for the entire tax period and you were residing in that country for a permanent or indefinite period of time, then you will elect to qualify as a bona fide resident.
Some factors that could be important in establishing yourself as a bona fide resident:
- type of visa with which you entered the foreign country; Is it necessary to say that a tourist visa can cause surprise?
- Limit of stay visa? see above
- Keep your home in the US while living abroad? if so, disclose and explain. This is not a decisive factor, but it could indicate that your intent was less than that of a permanent or indefinite nature.
Once you have established yourself as a bona fide resident, it is assumed that you remain a bona fide resident until you establish otherwise.
Proof of physical presence
If you do not meet the criteria to be a bona fide resident of another country, you can take the physical presence test. To qualify, you must have lived outside of the US for at least 330 days out of any 12-month period in a row. There are lines on the form (line 16) that you will need to complete to show which countries you resided in and during which dates. In general, proof of physical presence will be useful for those who moved outside the United States but were not established in their bona fide country of residence on the first day of the tax year, for those who were outside the US but in multiple jurisdictions, and for those who have a job or vocation that has taken them out of the country but do not meet the semi-permanent or indefinite period requirement. An important point to note is that you do not have to have met the 330-day requirement by the end of the tax year, but rather by the filing date, including extensions. Additionally, if your period outside the United States extends into subsequent periods, you may be allowed a prorated amount of the exclusion. For example, if you move to England on July 1, 2009, and stay there until July 1, 2011, you may qualify for half the amount of the exclusion for 2009, the full amount for 2010, and half for 2011. As you can imagine, it’s much more complicated than that, and you may not qualify for any of the exclusions for any of these periods. See the instructions for Form 2555 and Publication 54 for more details.
Can I exclude income from my investments?
No, Form 2555 only helps with income earned from your employment or trade or business while you qualify based on the tests above. If you paid taxes on your foreign investments, then you can get a credit for that on your Form 1116.
In conclusion, the expatriate American has recently earned increased scrutiny from Congress and the Internal Revenue Service. For most Americans, however, avoiding unnecessary taxes can be a fairly simple matter thanks to the ability to exclude your foreign source earned income on Form 2555.