Filing Requirements for Citizens and Resident Aliens Living Abroad The rules for filing income taxes are generally the same whether you are in the US or in a foreign country.
Your gross income, filing status, and age generally determine whether you must file an income tax return.
The IRS updates the minimum income requirements regularly.
For purposes of determining whether or not there is a filing requirement, gross income must also include any income that one plans on getting excluded under foreign earned income rules.
All the same rules apply regarding due dates, extensions, and estimated taxes as well.
The amounts reported on your U.
S.
tax return must be expressed in U.
S.
dollars.
If you are paid (in whole or in part) in foreign currency, you must translate it into U.
S.
dollars on your return.
If you pay expenses (in whole or in part) in foreign currency, you must translate it into U.
S.
dollars on your return.
The exchange rate that should be used is the prevailing rate at the time the income is received or the expense is incurred.
If you owe taxes on your return, you must also pay what you owe in U.
S.
dollars.
If your income is "blocked" or otherwise not readily convertible, you have two options: (1) you can report the full income and pay with other available U.
S.
dollars, or (2) you can postpone the reporting of the income until it becomes "unblocked.
" The second option necessitates the filing of an additional "information return" with your tax return.
Income becomes unblocked when it becomes converted or convertible.
Foreign address filers may e-file.
This is still the method the IRS prefers.
However, if you file a paper return, it should be sent to the Austin, Texas service center for processing.
Residents of U.
S.
territories are generally required to file with the particular territory, not with the United States.
Withholding Tax U.
S.
employers generally must withhold U.
S.
income tax from the pay of U.
S.
citizens working abroad.
However, the employer of a U.
S.
citizen working abroad may reduce the amounts withheld to the extent that the employee plans on excluding portions of his income pursuant to the rules discussed in this memo.
The employee should provide a statement to the employer that has been signed under penalty of perjury.
This may be done on Form 673.
Usually Social Security and Medicare taxes do not apply to income earned in foreign countries.
Requirements for Claiming the Foreign Earned Income Exclusion and the Foreign Housing Exclusion/Deduction The tax breaks available to foreign income earners are: the Foreign Earned Income Exclusion, the Foreign Housing Exclusion, and the Foreign Housing Deduction.
In order to claim any of these deductions, your tax home must be in a foreign country, you must have foreign earned income, and you must meet the requirements of the bona fide presence test or the physical presence test.
This is where the rules become convoluted and difficult to apply.
1.
Tax Home in Foreign Country Tax Home Your tax home is the general area of your place of business or employment regardless of where you maintain your family home.
It is the place where you are permanently or indefinitely engaged to work and is not necessarily the same as your residence or domicile for tax purposes.
The location of your tax home often depends on whether your assignment is temporary or indefinite.
It also depends on the specific actions you take that reflect your intent to remain in that foreign location.
Foreign Country A "foreign country" includes any territory under the sovereignty of a government other than that of the United States, including that country's airspace and territorial waters.
Excluded from the definition of "foreign country" are Antarctica and any of the U.
S.
possessions.
2.
Bona Fide Residence Test / Physical Presence Test Bona Fide Residence Test To qualify under this test, you must be a U.
S.
Citizen or resident alien who is also a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year.
Whether or not an individual is considered a bona fide resident depends on all the facts and circumstances.
The IRS makes this determination based on what is reported on Form 2555.
Some of the factors that the IRS considers are intention, purpose of trip, and nature/length of stay.
Physical Presence Test To qualify under this test, you must be a U.
S.
Citizen or resident alien who is physically present in a foreign country for 330 full days during a period of 12 consecutive months.
The 330 days do not have to be consecutive.
This test is based entirely on how long you stay rather than your intentions and actions while you are there.
3.
Foreign Earned Income Once the first two elements are met, it is easy to apply the "foreign earned income" requirement - it is simply any income you receive for services you perform while your tax home is in a foreign country while you meet either the bona fide presence test or the physical presence test.
Of course you also have to make sure that the income is in fact earned.
Earned income is defined as "pay for personal services performed.
" Earned income includes salaries, wages, commissions, etc.
By law, foreign earned income does not include any amounts paid by the United States or any of its agencies to its employees.
Foreign Earned Income Exclusion If you qualify under the rules above, you may exclude $87,600 of your foreign earned income when filing your taxes.
In 2009 that figure will be adjusted upward.
For married individuals, each spouse may claim this exclusion (for a total of $175,200) if each meets one of the above tests.