I'm nearly 7-thousand miles away from home, but no matter how far you go, you can't escape them ...TAXES! This year I had the added burden of figuring out what to do as a resident of a foreign country with foreign earned income.
First, you start asking others. Then, you look up information on the internet. You read blogs and community forums and everyone says something different. It's confusing. So, then you go right to the source...the IRS. While all forms are printed in English, it doesn't mean they're easy to understand. So, then you ask an accountant back home, and still you're confused. I have wanted to pull my hair out.
So, in the interest of helping others experiencing the same agony, I'll share some things I've learned that may help American taxes payers living abroad. Read on to de-mystify foreign earned income and how to get an extension.
- First, you must report all foreign earned income to the IRS. You may not have to pay taxes on it (we'll get to that), but you report ALL income.
- All foreign income will include any housing and other paid benefits you get from your employer. Housing, A company car, and paid airfare are common forms of alternative income for foreign residents. The IRS makes it clear, this income should be reported.
- You must report your income in US dollars.
- Go to www.irs.gov for full details. Publication 54 deals with foreign earned income.
Foreign Earned Income Exclusion (FEIE): Do you have to pay taxes on your foreign income? Maybe not...
- If you meet certain requirements, you may qualify for the Foreign Earned Income Exclusion (FEIE). (This mean you won't pay US taxes on your foreign income) You will need to fill out tax Form 2555 or Form 2555 EZ and then attach it to your form 1040.
- The maximum FEIE per individual for 2010 is $91,500.
- To qualify your "tax home" must be in a foreign country. Your tax home is the area of your main place of business/employment, regardless of where you maintain your family home. (Publication 54 has the details)
- However, you must pass the "Bona Fide Residence Test" or "Physical Presence Test." The "Physical Presence Test" is the easier of the two to qualify for. It means the US taxpayer must have been physically present in a foreign county for at least 330 consecutive days during a 12 month period. That 12 month period must have started or ended during 2010.
- Form 2555 will also cover your Foreign Housing Exclusion. So, if you live in company-provided housing or get a stipend for housing you can deduct that income. Yes, this is income! Here's a breakdown of the requirements to qualify.
- What if you can't pass the "Physical Presence Test" by April 18th? Well, you can file for a special extension (Form 2350). If accepted, this extension allows you to file taxes once you've reached your 330 days to qualify for the FEIE.
- However, you must PAY taxes owed by April 18th, otherwise you will incur penalties and interest.
- Keep in mind that extension Form 2350 is different from the typical form (Form 4868) used to file for extensions.
- Also, it's good to know that many types of tax software (including Turbo Tax) do not support Form 2350. That means it may be difficult to e-file this form. I accessed the form on the IRS website, filled it out and mailed it in.
- More good news about tax extensions: If you are "out of the country" (meaning that on April 18th, you lived and worked outside the US) you get an automatic 2 month extension on your taxes. You do NOT have to file a form to get this extension. However, you must attach a statement to your tax return explaining how you qualified. For a calendar year return, this means your taxes are due June 15, 2011.
- Keep in mind -- each state has different rules for extensions. Many honor the federal extension, which you'll just have to show proof of once you file your state taxes.
Foreign Tax Credit:
- If you are paying income taxes on your foreign income, you may qualify for a foreign tax credit. This way, you don't have to pay taxes on your money twice
- However, once you choose the FEIE, you can't then claim a foreign tax credit on the excluded income.
- To choose the foreign tax credit you generally must complete Form 1116 and attach it to your Form 1040.
- You could choose instead to do an itemized deduction, in which case you must itemize deductions on Form 1040, Schedule A. However, I recall reading that you get a bigger deduction if you do the work and go for the foreign tax credit
- If you have a foreign address, then you can not e-file your tax return. You must mail it in to the IRS.
- It's also good to know that you're US Embassy has only limited IRS information available. They will NOT be able to answer any specific tax questions and will refer you to the IRS.
Clearly, I am not a tax professional and I'm not issuing tax advice. This information is also not exhaustive as everyone's tax situation is different. I am just trying to gather some helpful information and put it in one place. Frankly, it took me much too much time to find all of this information. The most helpful information came from the IRS website and it's information you can trust.. Access Publication 54 here for more answers.
Good luck...you may need it!