Frequently Asked Questions
The best thing to do now is file your income taxes now and pay any related penalties and interest. Although you have to file only for those years where your earned income was more than a specified amount for that year or $400 if you are self employed, we recommend filing for all past years to establish a 3-year statute of limitation break on your filing history.
You will need to submit the amended tax returns including all of your income. The best thing to do is to gather together your tax documents and your old returns and send them to us. We will file the amended return including your global income.
If you are filing voluntary, you do not lose the right to the exclusion. I you are being audited, you lose this right.
4. Then, I would have no taxes due because of the foreign earned income exclusion, so why do I have to file?
You must file even if your tax due is zero.
Only for federal income taxes - but you are responsible for medicare and social security taxes (and entitled to such benefits upon required age).
6. I own my own business overseas, which is a legal entity in my country of residence. Do I qualify for the foreign earned income exclusion, and do I have to pay social security and medicare taxes?
You qualify for the exclusion from the income tax on compensation for personal services provided to your business. You do not have to pay U.S. Self-Employment tax on that income because this income is treated as wages, not as income from self-employment. You have, however, to file U.S. information return on the corporation or partnership you own in the foreign country.
Depending on your state of residence, you may or may not. Unfortunately the list is extensive - but if you contact us we would be happy to check.
8. I am a civilian working overseas in direct support of the US armed forces; do I qualify for combat pay income exclusion or any kind of extension of deadlines?
While you do not qualify for the combat zone military pay exclusion, as this exclusion only applies to members of the US Armed Forces, you do qualify for an extension for the filing and paying of your income taxes. This extension gives you 180 days after your last day in the combat zone. During this period, no interest or penalties attributable to the extension period will be assessed.
9. Due to a medical emergency, I had to come to the US and because of this time I do not meet the 30 days for the physical presence test. Is there an exception under medical emergencies?
No. The only exception for the 330 day requirement in the physical presence test is when you must leave the foreign country due to war or civil unrest.
10. Am I taxed on the market value of the residence that my employer provides for me while overseas?
Unless living in those quarters is mandated by your employer for business reasons, it is indeed taxable income (Though it could be part of your foreign earned income exclusion).
11. I have to pay US taxes, but I do not have US Dollars and my home country currency is not fully convertible. How can I comply with my duty to pay taxes?
If you face the issue of blocked income due to foreign currency restrictions in your home country, you could postpone the reporting and payment until the currency becomes unblocked, or pay with funds you may have in the US. If you decide to postpone. you would file certain information and no penalties or interest would accrue.
No. The exclusion only applies to earned income (i.e. wages).
14. I was only a couple of days short of meeting the 330 days for the physical presence test! What luck! Is there anything I can do to avoid this large tax bill?
We can file an extension on your behalf, and wait to file until you have met the 330 day requirement (Yes, even if you are using days from the next fiscal year).
Not reporting your bank accounts abroad. This applies to any person that has a financial interest in, signature authority or other authority over any financial account (s) in a foreign country and the aggregate value of these account(s) exceeds $10,000 at any time during the calendar year. Not reporting can make you subject to civil and criminal penalties, and penalties of up to $100,000.
16. I am a US citizen and I have been working in Argentina for more than 5 years as a chemical engineer. I was not planning on staying this long in a foreign country but I have gotten married here and I plan to live here for many more years. Since I am not in the US, does that make paying federal taxes voluntary?
You are not exempt from paying taxes. You are taxed on the basis of your citizenship and not your residency. Americans are taxed differently from citizens in most countries. However, there are special exemptions that you may look into. There are credits for taxes that you pay to the country where you reside as well as an the foreign earned income exclusion. Take note that this exclusion is adjusted for inflation annually and is estimated to be $91,400 in 2010. In addition, there is no statute of limitations on tax collections if you have never filed your income tax return. Obligations grow each year that they are not paid. To report income, you have to first file the right IRS form and the Form 2555 (Foreign Earned Income Form) or Form 2555-EZ, in addition to the IRS Form 1040. Form 2555 is for those who own houses and/or are self-employed. Form 2555-EZ is for those whose income is less than the amount of foreign income exclusions and will not be applying for housing and self-employment deductions. There still is an April 15th deadline but the IRS allows an automatic two-month extension to file the forms.
17. I started my job in Poland as an interior designer in July 2008 and went back to New Jersey in December 2008 to sell my car and my house there. It took me awhile and I resumed my job in Warsaw in July 2009. Am I entitled to the foreign earned income exclusion?
Since you have been going back and forth, the length of time that you have spent in a foreign country does not amount to a year. To meet the bona fide resident test for a foreign country, you must have lived there for an uninterrupted period that includes an entire tax year; that is from January 1 through December 31. You must also make this country as your tax home. You fail to meet this test. Your purpose in the country is to work there and not to live there permanently. You do not want to run the risk of being audited and then losing the exclusion.
You are required to fill out the Foreign Bank Account Report (U.S.Treasury Form 114) to disclose accounts you hold in foreign banks and other financial institutions if your total balance of all accounts is $10,000 or greater at any point during the year. The form has to be submitted with the US Treasury Department by April 15. Form has automated extension through October 15 (no extension request is required). You will have to provide information on all your financial accounts held in a foreign country including bank accounts (checking and savings), investment accounts, mutual funds, retirement accounts, and securities and other brokerage accounts.
The instructions for filling out Form 114 state that every US citizen or resident alien, partnership, corporation, estate, or trust must file FBAR if they have ''financial interest in or signature authority, or other authority over any financial accounts, including bank, securities, or other types of financial accounts in a foreign country, if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year.''
The FBAR is not an income tax return and cannot be filed on paper. It must be e-filed through the http://bsaefiling.fincen.treas.gov/main.html.
Penalties will be assessed for failing to file this report and as they are quite harsh, we recommend that you make the effort even if you missed the filing deadline.
There are exceptions to this rule. You do not need to report accounts held at US military banking facilities or if your banks are located in Guam, Puerto Rico, and the US Virgin Islands. There are also no need to report US-based accounts held by a branch or division of a foreign bank.
19. I am a New Yorker living in Czech Republic. I have always been paying taxes to the US. The first time I have heard of the Foreign Bank Account Report was last month. I heard that tough action is being threatened against those who do not file the form. What do I do now?
If you do not have sufficient time to get the information required for filing the FBAR on or before June 30, 2009, you should file the delinquent FBAR report as soon as possible. Attach a statement to explain why the report was filed late. Send a copy of this delinquent FBAR, along with a copy of the 2008 tax return, by Sept. 23, 2009, to the Philadelphia Offshore Identification Unit. Provided all your taxable income was reported, you will not be imposed a penalty for your failure to file on time.
On June 24, 2009, the IRS offered the following advice: Taxpayers who reported and paid tax on all their 2008 taxable income, but only recently learned of their FBAR filing obligation and have insufficient time to gather the necessary information to complete the FBAR, should file the delinquent FBAR report according to the instructions and attach a statement explaining why the report is filed late.
20. I am an expat living in Italy. This is the first year that I will be required to pay taxes as a US citizen living in a foreign country. My employer has been generous enough to pay many of my expenses here, including the rent, utilities, education of my 2 kids, as well as insurance and taxes associated with my living here. Can I use these for exemptions? What is the maximum limit?
What you are referring to is the Foreign Earned Income Exclusion. The expenses you mentioned can be applied towards the foreign earned income exclusion up to the maximum amount for the year ($91,400 for 2010) as long as they were included in your taxable foreign earned income. The following expenses qualify for the exclusion: rent, Fair rental value of housing provided by your employer, repairs, utilities other than telephone, real property and personal property insurance (homeowners & renters insurance), occupancy taxes, nonrefundable security deposits or lease payments, furniture rental, residential parking fees, tax equalization payments paid by your employer, education expenses for your dependent children.
21. I have made a voluntary disclosure of my tax obligations and was asked to pay a 20% offshore penalty. Should I pay this penalty? Is it negotiable?
The 20% penalty is far less than the penalty if you do not follow the amnesty program, and is not negotiable for the most part. However, according to the New Foreign Bank Account Report (FBAR) FAQs issued by the IRS on June 25, 2009, if any part of the penalty structure is unacceptable to a taxpayer, that case will follow the standard audit process. All relevant years and issues will be subject to a complete examination. At the conclusion of the examination, all applicable penalties (including information return and FBAR penalties) will be imposed.
The IRS added that these penalties may be greater than the 20% penalty initially calculated. You do not have any options if you want to get up to date with your responsibilities as a US taxpayer.
22. In have been paying taxes on time and in full ever since I became an expat. Last year, my financial situation worsened and I may be late in making tax payments. Which penalties incur interest? From what date does the interest accrue?
If you are referring to accuracy-related or delinquency penalties, interest is assessed from the due date of the tax return. For all other penalties, interest is computed from the date of assessment of the penalty.
The failure-to-file penalty assesses a 5% charge on the U.S. tax due, up to a maximum amount of 25%. The failure-to-pay penalty equals one-half of 1% of the amount owed per month, maxing out at 25% as well. You will be charged interest on an unpaid balance at the prevailing rate. You may also have to pay a penalty for not paying sufficient estimated taxes. Keep in mind that the penalty for not filing at all is higher than the penalty for not paying on time and that by paying a partial amount, you can limit the penalty and interest charges.
23. I already pay taxes in Norway where I have been staying for the past 4 years. What can you tell me about foreign tax credit?
You can claim a credit for taxes that you have paid in a foreign country. Not included in this computation are the taxes paid on any income, which has been excluded from US taxation using the foreign earned income exclusion or the foreign housing exclusion. A tax credit is more valuable than a deduction since a tax credit reduces your liability on a dollar-for-dollar basis. Get your total foreign-source income and divide it by your total worldwide income. This resulting percentage, when multiplied with your US tax liability, must not exceed your foreign tax credit.
If your foreign tax credit is higher than your limit, you may be able to carry the excess credit over to the next year or you may even apply it to one of the previous two years.
Not all types of taxes qualify for the foreign tax credit. The IRS says that four qualifications have to be met. The tax should be imposed on you (and not the employer); the tax must be owed or already paid by you; the tax has to be legal; and the tax is based on income that you earned.
In many cases, you will not need to file a State Income Tax Return; however, each State has its own rules and some states require you file a Tax Return even if you have moved abroad. We will check the rules for your state when preparing your Federal Return and let you know if you need to file a State Return.
It depends on whether your friend is a US resident or not. If he, like yourself, is a US resident living in a foreign country, then gift rules are the same as for US gift - you do not pay tax on any gift amount and the giver pays gift tax on the amount over $13,000 (for 2011). If he is a non-US resident, then you are not paying tax but must report the gift to IRS if its value exceeds $100,000. Your friend, though, should consult the local tax specialist on what tax consequences his gift will have in that country. You can find more details at the IRS website.
Your residence position is based on how many days you physically spend in the UK (with every day you are in the UK at midnight being counted as a day for these purposes) as well as your longer term intentions. Any individual coming to the UK intending to stay for at least 3 years will be regarded as resident and ordinarily resident in the UK from the date they arrive. If you are only intending to stay for between 2 and 3 years it is possible you could be regarded as resident but not ordinarily resident as long as you abide by certain rules such as not purchasing a property in the UK. If you come to the UK intending to stay less than 2 year your residence position would be based on the number of days spent in the UK, as long as you were physically present here for less than 183 days in any tax year (UK tax years run from 6 April to 5 April) you would not be regarded as resident in the UK.
Your residence position is important when considering how foreign income is taxed in the UK while your UK earned income is taxed in the UK regardless of your residence position.