A number of clients have asked us whether a U.S. expat can receive a tax refund from the IRS despite living overseas. While the answer to this question can be nuanced depending on the circumstances, the general rule is that living overseas does not preclude an expat from entitlement to a refund that is otherwise due to the individual.
Tag Archive for Foreign Earned Income Exclusion
One of the most common tax relief measures available to U.S. expats is the Foreign Earned Income Exclusion (FEIE). If you qualify, you may be able to exclude all or part of your foreign salary/wages from your income when filing your U.S. federal tax return. Here are five key tips to keep in mind regarding the exclusion:
Not many U.S. expatriates realize that the foreign earned income exclusion is an election and is not automatic. In a recent tax court Nancy McDonald learnt this in a painful way when her exclusion was denied. Nancy McDonald V. Commissioner TC Memo 2015-169.
IRC Section 911(a) provides that a qualified individual may elect to exclude from gross income the foreign earned income of such individual. To qualify for the foreign earned income exclusion (FEIE), the taxpayer must satisfy a three-part test:
1. Taxpayer must be a U.S. citizen who is a bona fide resident of a foreign country for an entire taxable year or physically present in a foreign country during at least 330 days out of a 12-month period, sec. 911(d)(1); Read more
WASHINGTON — The Internal Revenue Service reminded U.S. citizens and resident aliens, including those with dual citizenship who have lived or worked abroad during all or part of 2014, that they may have a U.S. tax liability and a filing requirement in 2015.
Most People Abroad Need to File
A filing requirement generally applies even if a taxpayer qualifies for tax benefits, such as the foreign earned income exclusion or the foreign tax credit , that substantially reduce or eliminate their U.S. tax liability. These tax benefits are not automatic and are only available if an eligible taxpayer files a U.S. income tax return.
The filing deadline is Monday, June 15, 2015, for U.S. citizens and resident aliens whose Read more
In a recent blog entitled, “FATCA GIIN January 2015 FFI Registration Analysis … by the numbers,” Professor William Byrnes provides a brilliant commentary on the IRS’s publication of its first FATCA GIIN list of the new year (published on New Years Day!). The FATCA GIIN list is a list of “approved FFIs (Foreign Financial Institutions)” that have registered on the IRS FATCA portal by December 23, 2014.
For those who have never heard of a “GIIN” and who may have initially confused it with a certain type of drink that mixes exceptionally well with tonic, GIIN stands for “Global Intermediary Identification Number.” A Foreign Financial Institution (FFI) that registers on the “FATCA Registration Website,” upon approval, receives a Global Intermediary Identification Number (GIIN) from the IRS (unless the FFI is treated as a Limited FFI). The GIIN is a Read more
Application of Foreign Earned Income Exclusion to Civilian Contractors Working In Combat Zones – Part II
This is Part II of a two-part blog series. After establishing that they have a tax home in a foreign country, taxpayers must still establish that they satisfy the 330 day physical presence test or the bona fide residence test. See IRC section 911(d)(1).
I. 330 Day Physical Presence Test
The 330 day physical presence test is the epitome of a “hard and fast rule.” To satisfy the test, the taxpayer must establish the following (there are “no ifs, ands, or buts about it”):
(1) That he is a U.S. citizen or resident of the United States, and
(2) That he was physically present in a foreign country or countries for at least 330 full days Read more
Application of Foreign Earned Income Exclusion to Civilian Contractors Working In Combat Zones – Part I
This blog addresses the foreign earned income exclusion rules as they apply to civilian contractors, and other civilian employees, who work in foreign country combat zones. By “civilian,” I am specifically referring to individuals who are not employees of the United States or any agency of the United States.
I. IRC Section 911 Foreign Earned Income Exclusion
Let’s start with some basics. IRC section 911(a)(1) allows a “qualified individual” to exclude his foreign earned income and housing costs from gross income. In the same way that the foreign tax credit limitation limits the foreign tax credit to the amount of U.S. tax attributable to foreign-source income, IRC section 911(b)(2)(D) limits the amount of foreign earned income that may be excluded to an amount adjusted annually for inflation. Read more
Americans working abroad may be eligible to exclude certain foreign earned income (wages, compensation for services) from US taxable income under the rules governing the Foreign Earned Income Exclusion (FEIE). The FEIE amount is adjusted annually for inflation. This amount for 2014 is $99,200. If a couple is married, each spouse can claim the full FEIE amount (e.g., for 2014, each spouse can exclude up to $99,200 of his or her earned income). If one spouse does not earn enough salary to fully utilize the exemption amount and has “excess” FEIE, this excess cannot be used by the other spouse to exclude amounts beyond his or her own exemption.
The exclusion can apply regardless of whether any foreign tax is paid on the foreign earned income, provided certain tests are met. Generally, for an individual to qualify for the Read more
A foreign housing exclusion is available for certain overseas housing expenses that exceed a “base housing amount”. Generally, the allowable housing expenses are the reasonable expenses (such as rent, utilities other than telephone charges, and real and personal property insurance) paid or incurred during the year by the taxpayer, or on his behalf, for foreign housing. The housing costs include those of the spouse and dependents if they lived with the taxpayer. Allowable housing expenses do not include the cost of home purchase or other capital items, wages of domestic servants, or deductible interest and taxes. Some taxpayers mistakenly believe if they use only a portion of the employer-provided housing amount, they can still deduct the full amount permitted under the foreign housing exclusion rules. This is not so. To be eligible for exclusion, the taxpayer must actually incur these amounts in rental payments (for example, paid to the landlord on his behalf by the employer or paid by the taxpayer to the landlord from his employer-provided housing amount).
To be eligible for exclusion from tax, the allowable housing expenses must exceed a so-called “base housing amount”. The base housing amount is 16 % of the maximum Foreign Earned Income Exclusion amount (FEIE). For 2013, this “base housing amount” is US$15,616 (computed as follows: 16% x US$97,600 – the 2013 FEIE amount). Reasonable foreign housing expenses in excess of the ”base housing amount” are eligible for the exclusion, but such Read more
The foreign earned income exclusion needs an acronym or a nickname or something, because that is a mouthful and I am not aware of any common shortcuts. I guess I will try FEIE, but I admit that seems lame.
The FEIE is a spectacular way to pay less United States taxes if you are working in a foreign country. A U.S. Citizen is required to file a return and report their worldwide income, even if you are spending the whole year teaching kids in Haiti, or working for a tech company in Germany, or playing hockey in Russia. It doesn’t seem fair that you pay taxes to both the U.S. and the country where you are working, so there are two options available to reduce your U.S. tax liability.
The first option is the foreign tax credit; basically you get a credit for the taxes you paid to the foreign country on the income that is also being taxed by the U.S.. If the tax in Haiti is 10%, but the US tax is 25% then you end up paying the U.S. only 15%. If the tax in Germany is 25% and the U.S. tax is 25% then you won’t pay any U.S. tax; it would all be offset by the credit. Not a bad choice, but the FEIE is even better.
The FEIE allows you to exclude up to $95,100 of earned income from a foreign country (for 2012) if you meet the requirements. That would mean if you make $80K in Haiti you would pay the Haitian tax, but you would be able to pay 0% to the U.S. because the income would be excluded – no need for the foreign tax credit. Other than the requirement for it to be earned income, there is really only one big hurdle and there are two ways to clear it. You can either qualify as the bona fide residence test or the physical presence test. Bona fide residence means you have established a permanent residence in the foreign country. The physical presence test is, you guessed it, a counting of the days you were physically in a foreign country. Once you get to more than a year you can use the FEIE.
As with everything tax related, it’s much better to understand the tax consequences before you do something major like move to another country for a job. There can be some huge tax savings by meeting the requirements for the FEIE. It’s better to understand it before you head off for your foreign adventure.