Living Abroad? How Does This Affect your Taxes?

By Dr. John L. Stancil
Tax Analyst, WebTaxCenter.com

In today's global economy, an increasing number of Americans are living abroad for any number of reasons. For many Americans, this is a new experience, bringing up tax issues that they may not have considered in the past. One estimate places the number of Americans claiming a foreign address as in excess of four million, with the number increasing at a growing rate. Some may be there for a short-term assignment, others may be staying overseas indefinitely. Regardless of the reason or length of your stay, living in another country will have an impact on your U. S. income tax return.

As a resident of another country but still a United States citizen, you are subject to tax in the United States on your worldwide income. However, you may be eligible for the foreign earned income exclusion or you may receive credit for foreign income taxes paid. There are other tax provisions that may affect you if you are living outside of the United States. This article will discuss a few of the more common items affecting those living abroad. For further information on anything discussed in this article you are encouraged to consult your tax professional. Valuable information is available in IRS Publication 54, "Tax Guide for U. S. Citizens and Resident Aliens Abroad."

Automatic Extension to File and Pay

If you are living outside the United States on the due date of your return and your main place of business is outside the United States you will receive an automatic two-month extension to file and pay your taxes. All you have to do to receive this extension is to attach a statement to your return stating that you meet the qualifications of living and working outside the United States on the due date.

If you cannot get your taxes filed within the two-month extension period, you can file Form 4868 for an additional four months. You cannot normally get an extension beyond a total of six months. The additional extension is only an extension of the time to file your return. You must pay your estimated tax liability when filing the Form 4868.

There is one exception to the maximum six-month extension rule. If you need additional time to qualify to meet the bona fide residence test or the physical presence test (both discussed later), you may be able to get an extension of up to 30 days beyond the date you expect to meet either of these tests. Instead of delaying the filing of your return, you may file it when due, then file a 1040X, Amended Return when you meet one of the tests.

Your Return Must be in U. S. Dollars

The law requires that you express the amounts on your U. S. income tax return in United States Dollars. This means that you must convert the local currency to dollars on your return. Likewise, you must pay your tax liability in U. S. dollars.

This requirement to pay your taxes in U.S. dollars can be a problem if your income is blocked income. If there are restrictions on converting the income in your country of residence to U. S. dollars, you have blocked income. If this occurs, you have two options. First, you can file a timely return and pay the tax with U. S. dollars that you have in some other country.

Alternatively, you may postpone reporting of the income until it becomes unblocked. If you make this choice, you must file an information return, alerting the IRS to the fact that you have blocked income. To make such a report, show the income on an additional copy of the 1040. Label the return at the top "Report of Deferrable Foreign Income, pursuant to Rev. Rul. 74-351."

What if Your Spouse is a Non-Resident of the United States?

If you are married at the end of the year, and your spouse has the U. S. status of a nonresident, you may not be able to file as married or take an exemption for your spouse. However, you may file a joint return and receive an exemption for your spouse if you elect to treat your spouse as a resident.

If you make this choice, your spouse must report all of his/her income on your 1040. You make this choice when you both sign and attach a statement to your return that you are choosing this alternative. The choice is in effect until you end it or suspend it. Once ended, there are limitations on revoking the termination.

Foreign Income Exclusion

You can exclude up to $82,400 of your foreign earned income from taxation in the U. S. if you meet the requirements. If you are married filing jointly, both you and your spouse qualify for the $82,400 exclusion. This amount is indexed for inflation and can be expected to increase annually. In addition, you may qualify to exclude amounts received for housing.

To be eligible for the foreign income exclusion, as well as the housing deduction, you must meet three criteria:

• Your tax home must be in a foreign country. Your tax home is your main place of business, employment, or post of duty regardless of where you maintain you family home.
• You must have foreign earned income.
• You must meet the bona fide residence test or the physical presence test.

The bona fide residence test is met if you are a U. S. citizen or resident alien who is a resident of a foreign country for an uninterrupted period that includes an entire tax year. If you leave the country for brief periods to return to the United States, this does not count against you if you have a clear intention to return from such trips.

You meet the physical presence test if you are physically present in a foreign country for 330 full days during 12 consecutive months. These days do not have to be consecutive, nor do they have to be in the same country. Partial days do not count. Thus, if you leave the United States at 11 pm on July 10, and arrive in Spain on the following day, your first full day in Spain is counted as July 12.

Foreign earned income is income you receive for services while your tax home is in a foreign country and you meet one of the above tests. If you are a U. S. government employee your income is not considered foreign earned income and cannot be used for the exclusion or deduction.

In order to claim the exclusion, you should file Form 2555 or Form 2555-EZ.

This article is intended only to give a broad overview of the tax issues involved when a U. S. citizen lives in another country. It is not a detailed guide for preparation of your tax return. More information can be found at www.webtaxcenter.com or at www.irs.gov.

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Dr. John L. Stancil, a tax analyst for WebTaxCenter.com, has been a member of the Florida Southern College faculty since 1998. He received his bachelors degree from Mars Hill College and holds a M.B.A. from the University of Georgia. He later earned his doctorate in accounting from the University of Memphis. He holds four professional certifications, including CPA, CMA, CFM and CIA. Stancil has received the Florida Institute of CPAs 2005 Outstanding CPA in Public Service Award. (This award is given annually to a Florida CPA who has demonstrated significant contributions through community and civic activities.) He has also been recognized as the Expert of the Month on several occasions by allexperts.com.

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