Tax information for U.S. citizens or U.S. green card holders living and working outside of the United States
For a more detailed analysis of the summary below, view the full-length Article: Are You A U.S. Person Thinking Of Accepting A Foreign Assignment?
U.S. citizens and U.S. green card holders (resident aliens) have unique filing obligations, unlike the citizens of other tax jurisdictions. The U.S. imposes income taxation based upon citizenship, not based on tax residency and U.S. resident aliens are taxable on worldwide income for their lifetime unless they expatriate completely. Please see Article for more detail: Choosing To Renounce U.S. Citizenship Or Legal Permanent Residence (Green Card)
U.S. citizens and U.S. green card holders living and working outside the United States are required to file a U.S. tax return annually and report their worldwide income if they continue to meet the annually indexed minimum tax filing threshold amounts, consisting of the standard deduction and exemption.
Special Tax Laws & Regulations
Residing and working outside of the United States may permit the application of special tax laws and regulations when certain qualifications are met, permitting the offset of U.S. tax obligations in part or in their entirety. These rights of offsets are the result of the integration between the Foreign Earned Income Exclusion (FEIE), Housing Exclusion (HE) and/ or Housing Deduction (HD) available on Form 2555 – Foreign Earned Income and Foreign Tax Credits (FTC) available on Form 1116 – Foreign Tax Credit. The Foreign Tax Credit on Form 1116 may be considered if the foreign country has a foreign income tax.
At Protax Consulting Services, our primary goal and objective is to use these interplay of mechanisms – the Foreign Earned Income Exclusion (FEIE), Housing Exclusion (HE) and/ or Housing Deduction (HD) -in combination to wipe out any U.S. income tax.
However, this is not possible to the extent of U.S. source income, on which no foreign tax credit or exclusions are available. Under the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA), “stacking” must also be considered. Stacking allows taxpayers who are claiming foreign earned income and/or housing cost amount exclusions to be subject to the same tax rates as taxpayers with the same level of income who do not qualify for or elect to use the exclusions.
Additionally, internationally agreed to income tax treaties may also serve to reduce or eliminate your U.S. or foreign tax liabilities.
Qualifying for the Foreign Earned Income Exclusion
To qualify for the Foreign Earned Income Exclusion, you must meet two tests:
- Tax Home Test (THT) and
- Either a or b:
- Bona Fide Residence Test (BFR)
- Qualitative – requiring a full calendar year of foreign residence
- Physical Presence Test (PPT)
- Quantitative – requiring 330 full days of foreign presence out of any 12 month or 365 day consecutive period.
- Bona Fide Residence Test (BFR)
Form 2555 & Form 1040
Form 2555 or Form 1040 may not be filed until meeting both of the above two tests. Typically, the Physical Presence Test is used in years of transition that is in both years of expatriation and repatriation.
Typically, the Bona Fide Residence Test is used in intermediary years where the taxpayer is living and working outside the U.S. for a full calendar tax year.
In addition to the Foreign Earned Income Exclusion (FEIE) there is the Housing Exclusion (HE) for employed persons or the Housing Deduction (HD) for self-employed persons. This is an opportunity to augment the basic FEIE by an overseas taxpayer’s reasonable actual qualified foreign housing expenses.
Qualified foreign housing expenses are typically much higher than a taxpayer’s taxable employer-paid housing income/allowance, or living quarters. Additionally, it does not matter who pays for these qualified housing expenses. Regardless of whether you, the employee, pay directly for these costs or your employer directly pays or reimburses you for these costs, they are still includable as qualified foreign housing costs for determining the Housing Exclusion or Housing Deduction. However, these costs may also need to be included in your employment income, depending on if these costs are paid directly or reimbursed by your employer as they are considered taxable compensation.
The Housing Exclusion and/ or Housing Deduction are subject to an annually indexed base called the Housing Norm (or deductible) representing the amount that needs to be exceeded before any qualified housing costs are excluded or deducted and TIPRA has placed an overall effective cap on the total qualified housing costs eligible for consideration for either the Housing Exclusion and/ or Housing Deduction.
Protax’s services include consultations and assistance with various U.S. Expat or Expatriate compensation packages, including those that pertain to individual tax equalization or tax protection arrangements.
Tax Education is a Top Priority
At Protax, we are dedicated to educating our clients. We want them to be kept aware of U.S. tax laws affecting the amount of income tax they will pay, as well as the developing and constantly changing laws of U.S. taxation.
We invest the time and resources to meet with our clients as often as required to ensure maximum optimal tax savings mechanisms are in place.
These highly complex tax filings involve intricate terminology and Internal Revenue Code sections not understood by the majority of CPA practitioners, let alone average taxpayers. Therefore, only competent international tax CPAs should attempt these filings. Protax has an extremely qualified staff on hand year-round and also offers excellent articles on this website that will help explain these intricacies in more detail for U.S. expatriates.
We can advise you as to the applicable tax laws and regulations directly affecting you and we will consult with you on the preparation of your U.S. tax return Form 1040, Form 2555- Foreign Earned Income and Form 1116 – Foreign Tax Credit, as well as any required state tax filings all via electronic communication and the telephone and / or facsimile, where the situation precludes a one-on-one meeting.
Please contact us for a free consultation and for further details.
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