U.S. citizens and Green Card holders living abroad must pass either the Bona Fide Residence Test or the Physical Presence Test in order to qualify for Foreign Earned Income Exclusion. Using this exclusion is one of the most popular and legal ways to reduce your tax burden. However, just living overseas doesn’t automatically make you pass either of the tests. In this blog post, we will explain what the Bona Fide Residence Test really is. We will also share with you how to qualify for it and the most common mistakes by U.S. expats make with this test.
How To Qualify For Bona Fide Residence TestAas American Living Overseas
As we mentioned earlier, sometimes just living abroad isn’t enough to qualify for the Bona Fide Residence Test. Out of two tests, which make you eligible for Foreign Earned Income Exclusion, the Bona Fide Residence test is slightly more complicated. In practice, it gives you more days to spend in the US per year. However, it has more challenging requirements to meet.
The Canadian tax system is based on residency and not on citizenship, unlike its neighbor to the South. That means the main element of the tax system in Canada is your residency. It leads to the laws that those who are residents of Canada should declare their worldwide income. However, non-residents are only taxed on Canadian-sourced income. Hence you need to correctly determine your residency status to be aware of your Canadian tax liability.
Canadian Non-resident Vs. Resident For Tax Purposes
To find out if you are non-resident or resident for tax purposes, you need to take into consideration a few factors. Do you know what matters when you ascertain your residency status? That would be the following: reason and duration of your stay inside and outside Canada, the ties you form in another country, how frequently you visit Canada and residential ties you have with Canada. Based on these circumstances you can determine your residency status for tax purposes.
There are over 1,5 million Americans residing in Canada, either full-time or part-time. If you are one of them, you better be aware of Tax traps for U.S. citizens living and working in Canada. And besides a large number of Americans living in Canada, every year there are 300,000 new immigrants moving to Canada. We want to help each of you to understand the topic of Canadian tax residency and your tax obligations.
As a U.S. expat parent, you can claim The Child Tax Credit available for individuals with a qualifying child. A tax credit is better and more valuable than a deduction. Are you wondering why? Because it creates a dollar-for-dollar reduction of your tax bill as a subtraction from actual taxes you owe. Another advantage of Child Tax Credit is a refund. It means you can get your money back and not just a subtraction of taxes owed. The story of CTC starts back in 1998 when it was introduced as a small non-refundable credit of 400 USD. Read further to learn what CTC is in 2019 and who can benefit from it.
What are the changes to the Child Tax Credit in 2018-2019?
Tax Cuts and Jobs act introduced a few important changes to the Child Tax Credit in 2018-2019. Generally speaking, Uncle Sam has been generous to taxpayers who have children and have U.S. tax filing obligation. Trump’s tax reform actually sort of merged Child Tax Credit and Additional Child Tax Credit. It also decreased the earned income threshold and even introduced new credit for other dependents.
While many Americans abroad wonder if they have to pay US taxes on foreign income, the real question is about filing tax return itself. Many of US citizens living overseas do not owe any taxes to IRS. However, it doesn’t mean they don’t have to report their income on Form 1040. Majority of US expats confuse the filing threshold with Foreign Earned Income Exclusion. The latter one doesn’t determine your filing liabilities. It is there to exclude all or part of your foreign-source wages and self-employment income from U.S. federal income tax. Yet you need to file federal tax return and form 2555 to use Foreign Earned Income Exclusion.
There are a few things to remember about US tax filing obligations. First of all, determine if you are a U.S. person for tax purposes, as you do not necessarily need to have a US passport to possibly have US tax filing obligations. You may even need to file even if you don’t earn any money yet you are married to someone who has income. Yes, we know that US taxes can be quite complicated!
Tax Tip 1: Even though we have already mentioned FEIE above, don’t rush to select Foreign Earned Income Exclusion on your US expat tax return. In many cases, choosing Foreign Tax Credit is more beneficial. Tax professionals prefer the latter for a number of reasons.
What Is Form 1116 And Who Needs To File It?
When talking about US taxes and taxation of US citizens who live abroad, you may have heard of Foreign Tax Credit and the possibility to offset the US tax owing by using the taxes paid to another country. That way you can narrow the tax owing down to zero!
Most of the US international tax experts prefer claiming Foreign Tax Credit (Form 1116) on client’s U.S. tax return rather than preparing form 2555 (Foreign Earned Income Exclusion), since it is more beneficial. Read further to learn why FTC is a better way to save money on your US expat taxes.
Here are 5 quick facts about IRS Form 1116 and US tax returns:
- You claim Foreign Tax Credit on your US expat taxes by filing Form 1116
- You attach this form to a Form 1040, your individual US tax return
- The credit reduces your US tax liability on expat income dollar for dollar
- You cannot take Foreign Tax Credit against income which you have previously excluded by the Foreign Earned Income Exclusion
- And you can’t receive a refund of foreign taxes paid through your US tax return
This is an important post that we encourage you forward on to any person you know who is an American working and living abroad; or any accidental Americans who are caught up in this tax legislation. Please watch this video where John Richardson interviews Jim Gosart, Olivier Wagner and Solomon Yue about their work on behalf of all Americans Abroad. Although many other significant contributors have helped along the way, these gentlemen have been greatly instrumental in getting tax legislation H.R. 7358 to Congress.
If you have followed any of the initiatives to get this bill in front of Congress, you must know what they have accomplished is astonishing. The goal has always been to make the tax treatment of Americans Abroad fair. The new bill presented in Congress is appropriately called “Tax Fairness For Americans Abroad Act of 2018″ and you should follow it closely.
While all Americans are taxed in their worldwide income regardless where they reside, they also have Foreign Earned Income Exclusion to reduce the tax burden. And this is what our today’s tax infographic is about. In 2018 you can eliminate up to $104,100 of foreign earned income on your U.S. expat tax return. Let’s look into details and what this exclusion is about. Read More
More than a year ago, Congress passed law HR 22. It resulted in IRC section 7345 “Revocation or denial of passport in case of certain tax delinquencies”
This is a far-reaching law which covers all taxpayers owing more than $50,000 in back taxes. The intent of the taxpayer to leave the country is not a criterion. Nor it is limited to criminal cases, civil penalties are enough.
Before the IRS can revoke your passport, or prevent you from obtaining a new one, these seriously delinquent tax debt needs to be debt for which a:
- The government has issued a notice of federal tax lien and all administrative remedies under IRC § 6320 have lapsed or been exhausted
- The government has issued the levy
We want to talk about Bona Fide Residence Test, which one shall pass to qualify for FEIE. Are you an American abroad and you earn more than $10,000 USD a year? Then you are required to file U.S. federal tax return. If this is news to you, then you probably should know more about filing requirements for U.S. persons abroad.
However, if you are a U.S. expat who is aware of their tax obligations, then you probably heard about FEIE. It stands for Foreign Earned Income Exclusion. It allows you to exclude up to $104,100 for 2018 tax year from your taxable income. But in order to qualify for such exclusion, you need to meet requirements. One of them is to pass either Bona Fide Residence Test or Physical Presence Test.
We are regularly asked about expat offshore banking, best overseas countries, and banks for US citizens. It’s a well-known fact that a right bank can save money for US citizens traveling or living abroad. Many Americans abroad are looking into ways to invest through financial institutions. It can be either in their place of residence, in popular financial city centers or in offshore destinations. When choosing a bank, everyone usually pays attention to following criteria:
- ease of opening,
- Investment access and liquidity,
- asset protection,
- foreign transaction fees,
- exchange rate used to convert foreign transactions to USD,
- wire transfer charges,
- customer service etc.
Read further if you want to learn more about opening an overseas bank account as an American abroad.
U.S. expats can use the Foreign Earned Income Exclusion to reduce taxable income. And if you did you research on this topic, then you probably heard about tests to pass. American abroad has to qualify for one of the two tests. Today we explain what you need to pass the Physical Presence Test.
Let’s take another look at few general requirements to use FEIE:
- You should have foreign earned income
- Your tax home must be in a foreign country
- and one must qualify for one of the two tests, either Bona Fide Residence or the Physical Presence Test.
The IRS states that a U.S. citizen or a U.S. 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 qualifies for the Physical Presence Test, but is it really that simple?
Do you want to take advantage of the Foreign Earned Income Exclusion, the Foreign Housing Exclusion or the Foreign Housing Deduction? As a U.S. citizen or Green Card Holder living abroad, you still need to file annual U.S. federal tax returns. There are many different options, which American abroad has in order to cut the tax bill. However, the 3 above-mentioned ones are based on Foreign Earned Income.
So what is a Foreign Earned Income?
It’s crucial to understand what FEI is for US expats. We prepared this easy infographic to provide more clarity on this topic. The definition by the IRS states that it’s income you receive for services you perform in a foreign country:
Check out the infographic below to understand the classification of types of income and what is considered to be NOT earned income. We also included what the IRS doesn’t count as a Foreign Earned Income.