Expatriate Tax Preparation and Consulting
If you are a US Citizen living and working abroad, you must prepare and file a federal income tax return. If you are a resident of a state that has an income tax then you will also need to prepare and file a state return. In addition, depending on your foreign bank account balance and assets you may be required to file the foreign bank account report. As a US Citizen or green card holder you must prepare and file a federal income tax return on your worldwide income. Any income taxes you pay to a foreign government may be eligible for the foreign tax credit against your foreign income.
Professional tax preparation and advice can be vital during a foreign assignment. Nommensen, Williams, Sticker & Doyle, PC’s expatriate services can help you to reduce your federal and state income tax by utilizing the best method of compliance. We understand the physical presence test, bona fide resident and utilization of the foreign tax credit to calculate the lowest tax both for federal and state purposes.
Bona Fide Resident – Qualification for the bona fide resident status is being a tax resident of a foreign country for the entire calendar year (January 1 through December 31). This is a “facts and circumstances” test; therefore if you have submitted a statement of nonresident to that country you will not pass the bona fide resident test for the foreign income exclusion.
Earned Income Exclusion – Upon qualifying for the physical presence test or the bona fide resident status, a taxpayer may exclude up to an annual limit of foreign income from US federal taxes. The foreign income exclusion for 2016 is $101,300. This amount is pro-rated for the number of days eligible for the exclusion. A special extension is available for additional time to meet the qualification of either test.
Extension – A special extension is available for additional time to meet the qualification of either the physical presence test or the bona fide resident test. (Form 2350) A taxpayer does not need the special extension if they have met the test during the regular filing (April 15) or extension period (Oct 15).
Foreign Bank Account – A taxpayer with signature authority or a balance in a foreign bank account with the aggregate value of $10,000 at any time during the calendar year is required to file the Report of Foreign Bank and Financial Accounts (FBAR). This form is due June 30th of each year. The Form 90.22 has been replaced with FinCen Form 114. It must be filed electronically and is filed separately from the federal income tax return. If the taxpayer has over certain limits of financial assets in a foreign country they may also be required to file Form 8938 which is filed with their federal income tax return.
Foreign Housing Exclusion – A taxpayer may claim certain expenses related to housing in a foreign country if they qualify for either the bona fide resident test or the physical presence test. This exclusion is limited depending on the foreign country and then reduced by $44.28 per day or $16,208 for the year. (2016 limits)
Foreign Tax Credit – A taxpayer may be eligible to claim a foreign tax credit to the extent of US income tax on foreign income.
Hypothetical Tax – An employer will generally deduct a hypothetical amount from an employee to cover the portion of the foreign tax that the employee would have incurred had they remained in the states and not taken the foreign assignment. These dollars are not paid to the IRS, they are generally retained by the employer to offset a portion of the foreign tax paid on behalf of the employee.
Income – The gross income of a person working abroad will generally include all benefits paid on their behalf such as foreign taxes, housing, vacation, travel and tuition.
Physical Presence Test – Qualification for the physical presence test is being in a foreign country for 330 out of 365 days. The 365 days can be any 12 month period.
Social Security Taxes – An employee of a US company even though working abroad is subject to social security and Medicare taxes in the US. A contractor of a foreign company is subject to social security and Medicare taxes on their self-employed earnings even though working abroad. An employee of a foreign company is not subject to social security and Medicare taxes on the amounts earned in a foreign country. Depending on the foreign country, there may be a tax treaty whereby a taxpayer is not subject to social taxes in both the US and the foreign country or if a taxpayer pays social taxes to more than one country then they may be able to draw retirement benefits from both countries.(Totalization Agreement)
Tax Equalization – The tax equalization policy is an arrangement between the taxpayer and his employer whereby the taxpayer pays only the amount of tax that they would have paid had they not been in the foreign country. Generally final tax equalization is computed after the taxpayer’s return is filed.
Tax Protection – The tax protection policy is an arrangement between the taxpayer and his employer whereby the employer allows the employee to keep any net tax benefit of being on the assignment.
Travel Days – Presence in a foreign country begins at midnight and ends at midnight; therefore travel days to a foreign country do not qualify for the physical presence in a foreign country.