What You Need to Know About the Expatriate Tax

With tax season now in full swing, it seems like just about everyone has an abundance of questions regarding their particular situation. At TH Tax Services, we love to help our clients ease their worries about everything related to taxes, where they’re looking for an expert Accountant to handle their financial gymnastics or the need to Find a Tax Professional for Expatriate Tax.
 That’s right, you may be wondering just what expatriate tax is and if it applies to your current situation. Actually, let’s rephrase that question: have you lived abroad, resided in multiple locales, or had different sources of income, especially those who live near Canada or Mexico? In this article, we’ll take a look at some of the finer details of expatriate tax that can help give you peace of mind. At the end, we’ll provide some information that will help you know exactly how your tax liability—or refund!—actually is.
 Lived Abroad?  Here’s What You Need to Know…
 If you’re standing, you may want to sit down in a comfy chair: If you are currently living abroad, you are responsible to report your income to the IRS. Even if you’ve spent a small portion of your time in the US, you remain responsible. This is also true for U.S. citizen/resident aliens—the rules of tax returns and estimated tax remain generally the same. Your worldwide income is subject U.S. taxation.
 It may ease your mind a little bit to know if that if you are a U. S. citizen or a resident alien residing in another country (or you’re in the military outside of the U.S.), you are allowed an automatic 2-month extension to file your taxes. This doesn’t count against you as your first extension, so you can have until June 15th to sort out the sometimes-tricky web of tax liability.
 If this still doesn’t seem very fair to your cosmopolitan lifestyle, it may give you some relief to know there’s also another added benefit that you may be privy to: foreign earned income  exclusion.
 The  Foreign Earned Income Exclusion
 To understand just what the foreign earned income exclusion, we must first understand what distinctions the IRS makes for income in the first place. The standard definition of earned income is “pay for personal services performed (ex. wages, salaries, and/or professional fees).”
 On the other hand, foreign earned income is the income that you have received for services you performed in a foreign country (or countries). Simple, right?
 Not so fast, says Uncle Sam! Qualifying for the foreign  earned income does take a few hoops to jump through. There are exceptions to what constitutes foreign earned income. The IRS defines them as:

• The  previously excluded value of meals and lodging furnished for the convenience of  your employer.
• Pension  or annuity payments including social security benefits.

• Payments by the U.S. Government, or any U.S. government       agency or instrumentality, to its employees.
• Amounts included in your income because of your       employer's contributions to a nonexempt employee trust or to a       non-qualifying annuity contract.
• Recaptured unallowable moving expenses.
• Payments received after the end of the tax year       following the tax year in which you performed the services that earned the       income.

If you’ve managed to qualify for these, then we can move on to the next phase. To be eligible for the foreign earned  income exclusion:

• Your  tax home must be in a foreign country;

• You must meet either the bona fide residence test or       the physical presence test (see       below); and,
• Earned income can be paid by either a U.S. employer or       a foreign employer.

Residency  Tests 
 How you file your expatriate taxes and exemptions that you may be entitled to does depend on qualifying for two tests: the physical presence test and the bona fide residence test. According to the IRS, these are as follows:

• Physical Presence Test: To  meet this test, you must be a U.S. citizen or 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. A full day means the 24-hour period that  begins at midnight.
• Bona Fide Residence Test: To  meet this test, you must be 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 (January 1st -December  31st, if you file a calendar year return), 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 (January 1st        - December 31st, if you file a calendar year return).

If you’re still confused about whether you qualify for each of these tests, the easiest definition to understand is that the physical test is based on your physical presence (duh!), while the bona fide residence test is based on your taxpaying intentions.
 Complications?
 There are a few factors that can add a bit of complexity on how and when to file your taxes. While many of these factors require an entire article to adequately explain each of them and are beyond the scope of this article, they are certainly worth considering. These factors include:

• Being  stationed abroad as part of the Armed Forces
• Different  rules apply depending on the date of your expatriation
  • On or after  June 17, 2008;
  • After June 3,  2004 and before June 17, 2008;
  • On or before  June 3, 2004
• Exchange  rates for foreign currency (average yearly or based on sole transaction)
• Renouncement  of citizenship
• Marital  status and the citizenship of your spouse
• Children  (born abroad and their status as dependents)
• Status as a  green card holder
• Dual  citizenship
• If you are  working for a U.S.-based firm located in another country
• Foreign  pensions
• Tax Treaties  between the U.S. and the countries you’ve lived/worked in
• If you need to register for an Individual Taxpayer  Identification Number (ITIN)
• Foreign gambling losses and gains
• Visa status

This, of course, is just the beginning! If you’re with us, great. If not, it may be in your best interest to Find a Tax Preparer.
 Other Tax  Breaks
 If you’ve felt that you haven’t been able to meet some of these requirements, there are more things to consider. You may be eligible for the foreign housing deduction and the foreign housing exclusions. To qualify for these requirements, you must meet these requirements:

• You must have foreign earned income
• Your tax home must be in a foreign country

In addition, you must also:

• 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,
• A U.S. resident alien who is a citizen or national of a       country with which the United States has an income tax treaty 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 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.