Every day we get questions about the expat tax rules and are always amazed how each situation is always a little different and has a different hurdle to cross. Here are some quick answers to those common difficult questions that come up on a regular basis:
Foreign Income Exclusion
Can only be taken by filing a return and completing IRS FORM 2555. No return, no exclusion!
Foreign Bank Accounts
If cumulative balance is $10,000 — including savings, checking, retirement, cash surrender value of life insurance — you must file an FBAR. Filed, no penalties. Not filed, risk penalties up to 27.5% of highest balance for year.
Require a tax ID or Social Security number, as applicable. Without it, no deduction!
You can file as “applied for” but the normal procedure is to send the application with the tax return. Make sure a notarized copy of birth certificate or passport is included with your application for an ID or Social Security number to insure hassle-free processing.
Foreign Tax Credits
In certain instances is may be to your advantage to take the Foreign Tax Credit (Form 1116) depending upon your offshore earnings and foreign taxes paid, either instead of the Foreign Income Exclusion or in addition to it, if your earnings exceed $92,900.
Foreign Income Exclusion vs. Foreign Tax Credit
Your decision must be carefully thought out since you are not allowed to change from year to year. To change you must request an election change which locks you in for the next 5 — that’s right, F I V E — years.
IRS Form 1040 NR
Is not for US citizens.
NR stands for Non-Resident Alien and is used for non-US citizens who receive US income. Confusing, huh?
Foreign Housing Exclusion
If you make for $92,900 for 2011 and have housing/utility expenses that exceed $14,865, consider taking your housing costs on Form 2555. You may be entitled to an extra exemption, and every little bit helps.
Passing the Physical Presence Test
Can be a little tricky if you recently moved or you travel back and forth to the US.
The key number is 330 days. Lucky for most, it can span over 2 years. For example, let’s say you move off shore March 1. You have until the following October 15, due date of the return with extensions, to meet the 330 day test.
This test requires that you are offshore 330 consecutive days, without returning to the US for more than 30 days within that time period.
Bona Fide Resident Requirements
May be more to your liking, if you have lived off shore from January 1 thru December 31 and have no real intention of moving back to the US any time soon.
It requires that you own no property in the States. The bonus is that there is no 330 day rule and you can travel back and forth pretty much without limitation.
Why Should I Have a Tax Specialist?
There’s plenty of software out there that is almost free. Our answer is really quite simple.
The tax laws are complicated and although software helps, you still need the right knowledge to achieve the correct result. Keep in mind that most taxpayers overpay their liabilities when they prepare their own return or rely on a foreign preparer, because of their limited understanding of what deductions and nuances that are allowed.
Diane Siriani is a Certified Public Accountant in Bingham Farms, MI. She has a full-service accounting/tax firm and income tax service in Wyandotte, MI and a global website called Expatriate Tax Returns. She’s very proud of her knowledgeable and service-oriented staff.
(If you’d like to use Diane’s tax service, just click the link above and enter the code EXPAT 2011 for a 20% discount.)