Explanation of Foreign Earned Income Exclusion
The Foreign Earned Income Exclusion, otherwise referred to and documented as FEIE, is an exclusion offered by the IRS to US citizens living abroad. Before we examine the details of the FEIE, we will take a brief look at the qualification standard set by the IRS. In order for an expatriate to claim the FEIE, he/she must have either:
Lived in their host country for a minimum of 330 days out of a full calendar year. This is known as the Physical Presence Test.
Lived in their host country for at least 1 year with no intention of returning to the United States for a number of years. This is known as the Bona Fide Residence Test.
The most recent allowance for the FEIE as of 2013 is $97,600 for single individuals. The FEIE is claimed on Form 2555, and a variety of other living costs such as housing, meal, and automobile expenses аре claimed on this form.
As important as it is to file your federal taxes as a US expat, it’s equally important to not disregard the taxation laws of your home state in the US. There are a great number of states which require residents (even while living abroad) to file a state tax return every year and report worldwide income.
Overview of the Foreign Tax Credit
Your income in a foreign country is undoubtedly going to be taxed by the country in which the income was generated. More times than not, the rate of taxation in other countries is higher than that of the United States. IRS allows US expats to deduct the amount of taxes paid to a foreign country from their income taxable by the United States.
Like the FEIE, you must file an additional form and attach it to your 1040. The form required to claim the FTC is Form 1116. In order to claim the Foreign Tax Credit, the taxes you are claiming:
- Must have been imposed onto you by your host country or another foreign country
- Must have been paid or accrued by you
- Must be taxes on income or a tax lien against you for foreign income taxes
- Must be taxes on income which is not included in the amount claimed on your FEIE.
US Expat Banking Activity Reporting Requirements
Understanding the requirements for and meeting the obligations of FBAR (Foreign Bank Account Report) will be extremely important for you as a United States expatriate. You may have become aware of recent charges having been brought against Swiss bank, UBS and clients of this bank who had engaged in criminal tax evasion. This is just one of thousands of recent measures taken by the United States Department of Justice to pursue US citizens and green card holders illegally holding money in offshore accounts. For these cases in which active pursuit was necessary, criminal prosecution is being sought against violators in addition to hefty financial restitution.
It is a requirement for all United States expatriates to not only report qualifying balance and account information to the Department of Treasury, but also any profit generated by these accounts to the IRS as income. Submitting this information to each agency is done in 2 completely different ways and correspondence is sent to 2 very different addresses.
To report income yielded from offshore accounts you will need to file Schedule B, and the questions regarding foreign accounts and trusts will be found in Part 3. There are a few situations in which a US expat is required to report income derived from foreign accounts to the IRS. These situations are:
Taxpayer earned the minimum threshold required by the IRS in the form of taxable interest, investment income, or other profit
Taxpayer had an interest in a qualifying foreign account or was a signer on said account
Taxpayer was involved in a trust account either by having received distribution or by having become a transferor to or grantor of a foreign trust account
How to legally denounce US tax liability permanently
The actual reporting of the accounts and account balances generating income should be reported to the United States Department of Treasury onthe FBAR Form by June 30th. There is one important exception for this requirement. If the combined total of these accounts was below $10K you would not be required to report them.
If you are unsure as to whether or not you need to submit FBAR to the Department of Treasury or claim income from foreign accounts on Schedule B, don’t guess; make sure to speak with an expat tax expert to avoid becoming non-compliant. It is becoming clear that the IRS, the Department of Treasury, and the Department of Justice are going to great lengths to ensure that US tax obligations are met by expatriates. The IRS is using documentation to track down offenders such as US passports, documentation of income received from and accounts held in other countries, and other information. The IRS is also trading information with the Department of Treasury and comparing forms to ensure that everything adds up appropriately.
US Expatriate Tax Return Filing Deadlines
As indicated earlier, US expats who are living overseas are granted an automatic 2 month filing extension – giving them until June 15th to file their US expat taxes. This is done in consideration of other countries’ timeline for delivering required financial documentation to its US expat residents. If an expatriate needs more time than offered by the original automatic extension, he/she may apply for another extension until October 15th.
However – you must pay any balance owed to the IRS by the original April 15th deadline. If you are unable to pay your estimated taxes for the year in question, that is no excuse to avoid communicating with the IRS. As a matter of fact, it’s the very reason you should be forthcoming with the IRS about your situation. Penalties and interest which may be applied to your late payment may not be as severe as those which will be imposed if you simply wait to file your taxes until you have the money to pay. There are numerous programs offered by the IRS to help with over burdensome tax obligations, and the best way to gain the help and sympathy of the IRS is to maintain communication with a representative about your US expat taxes and your financial situation.
About the Author: I.J. Zemelman, EA is the founder of Taxes for Expats.