U.S. citizens and resident aliens who live or work abroad, or who expect to receive income from foreign sources have a unique filing status and can often exclude a large part, if not all, of earned income from taxation by filing Form 2555 (Foreign Earned Income). The maximum foreign earned income exclusion for 2018 has increased to $104,100. In certain cases, there are even housing allowances you can use to reduce your taxable income if your earned income is greater than the maximum exclusion amount.

Who Qualifies For the Earned Income Exclusion?

To qualify for the foreign earned income exclusion, you must meet either the bona fide resident test or the substantial presence test. Simply stated, if your residency more closely resembles that of a foreign country you may meet the bona fide residence exclusion.  More commonly, if your residence remains in the U.S. but you have resided outside of the U.S. for an extended period, you can often exclude your earned income from U.S. taxation.

More on Bona Fide Residents

In order to meet the bona fide resident test you have to have been a resident of a foreign country for the entire tax year. However, even if you do, you don’t get to automatically meet this requirement just by being outside of the U.S. for the entire year. If you’re living outside of the U.S. for a limited period of time and your intent is to return to the U.S., you generally will not be considered a bona fide resident of a foreign country. For example, if your a U.S. citizen working in Afghanistan, chances are good that you have no intent to permanently reside in Afghanistan. Accordingly, you’ll be looking to file under the substantial presence test.

More on the Substantial Presence Test

More commonly used is the substantial presence test where a taxpayer remains outside of the U.S. for an uninterrupted period of 330 days in 12 consecutive months. These months do not necessarily mean from January 1st to December 31st, but rather any 12 month period before you actually file your return. This test has no requirements as to whether or not you intend to stay, or the nature of and purpose of your stay abroad.

What If You Don’t Meet the 330 Day Requirement for the Substantial Presence Test?

This is a common problem, especially if this is your first year in a foreign country. For example, let’s say you arrived on June 30th. How would you meet the 330 day requirement when you’ve only been there for half the year? Don’t panic! The 330 day rule is based on a rolling twelve month period. The 330 day test only requires that you stay outside of the U.S. for an uninterrupted period in a 12 month period. This means you may not meet the test today, but you may meet the test once June comes around and you’re still outside the country. You have two choices – either file  your return now and amend your return later, or extend the filing of your return until you meet the substantial presence test requirements.

Foreign Housing Exclusion or Deduction

In addition to the foreign earned income exclusion, you can also deduction housing costs paid by your employer — any qualified amounts paid to your or paid on your behalf by your employer without regards to the foreign income earned income exclusion. The housing deduction applies to amounts paid for with self-employment earnings. Certain limitations may apply.

Who Should File a Tax Return?

If you are a U.S. citizen or a U.S. resident alien,  you generally are required to file income, estate and gift tax returns and pay estimated tax in the same way as those residing in the United States. The filing requirements are very similar to that applied to citizens or residents that reside in the United States (U.S.). Where you are required to file an income tax return, you are required to file even if you don’t owe any taxes.

When are you required to file?

Generally, your 2018 tax return is due on April 15th.  However, you are automatically granted a 2-month extension (to June 15th) if on the due date of your return you were outside of the U.S.

What Items are Subject to Tax?

Your taxable income includes wages, self-employment earnings, interest, dividends and all other sources of income similar to those items that would otherwise be subject to tax as if you have resided in the U.S. It does not matter that you earned this income outside of the U.S. If you are a U.S. citizen or a resident alien of the United States and you live abroad, you are taxed on your worldwide income.

Are You Being Double Taxed? Isn’t There a Foreign Tax Credit

Many of our clients simply don’t want to double-taxed. That is, they’ve already been taxed in a foreign country, so why should they pay taxes again. Fortunately, there is tax relief for foreign taxes you have already paid. Its called the foreign tax credit. Simply stated, where you have already been taxed by a foreign country, it would be inequitable to tax you again on that same income. Accordingly, you can claim a foreign tax credit for those amounts already paid which effectively serves to reduce or eliminate income taxes you would otherwise be required to pay.

Why Should You File a Tax Return?

If you need to file your returns and haven’t, its time to get started.  The IRS has stepped-up enforcement actions specifically targeted at foreign income not reported by U.S. taxpayers.  Accompanied with recent advancements in technology, increased pressures on foreign countries and institutions to disclose your income to U.S. authorities, and increasing the penalties for non-compliance, we believe the days of omitting or under-reporting this income are limited.

How To Get Started

Preparing income tax returns for U.S. citizens and residents residing abroad is simply fairly complicated where it involves international tax treaties, foreign tax credits and foreign earned income exclusions.  Generally, you’ll need professional help. You’ll probably have lots of tax questions. You’ll probably have questions on how to count your days outside of the U.S., what if your married and your spouse lives here in the U.S., what about your house that’s being rented while your away, etc. Or maybe you haven’t filed your back tax returns and don’t know what to do.

We can help you bring it all together. You can send us copies of your tax documents by e-mail or fax. For back tax returns, we can even help you gather your tax documents that you may not have. It couldn’t be more convenient.

We can file your returns electronically, simply requiring your signature only. No need to mail in your tax returns to the IRS. You can call us through Skype (Skype name: cpamiami). Or Contact us today!