On The Americans Would Not The Russians Finance The Business The Unofficial Guide to Form 2555 Foreign Income Exclusion

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The Unofficial Guide to Form 2555 Foreign Income Exclusion

The United States is one of the few governments that tries to collect taxes from its citizens, regardless of where they are in the world. However, for years expatriate Americans simply did not file returns, in fact they were under the radar and faced few consequences for not filing. All this has recently come to a halt as the government is desperately trying to raise more revenue and many foreign taxpayers, who have failed to file for years, have received notices from the IRS that they have not been forgotten by the state.

The silver lining to this cloud is that the US Congress has given the expatriate (and unwilling) taxpayer two weapons to help fend off the lure of the IRS, Forms 2555 and 1116. For those who actually live overseas, the 2555 is a great gun. in the arsenal, because it allows the direct exclusion of certain income under certain circumstances. Of course, it wouldn’t be US tax law if it were easy to understand, and that’s why I haven’t linked the IRS Guide to Form 2555 here.

How Form 2555 can help you

In essence, Form 2555 means that the first $91,000 of income you earned while living abroad as a resident of a foreign country is subtracted back from your U.S. income in your tax calculation. For US citizens living abroad and who earn a large portion of their income from their labor but are not business tycoons, professional athletes, or investment bankers, this can be a mere formality without paying money on their US tax returns. “So Tyler,” you ask me, “I’ve never made more than 91 and I’m pretty sure I don’t have any debt, why should I spend the time and money it takes to file?” I admit it seems unfair, but I must warn you that if you don’t file, the IRS can file a refund for you, and it won’t be in your favor!

Problems with not registering

  • The statute of limitations never expires! The IRS can only audit a tax return for three years from the date of filing, except in cases of fraud or tax evasion. If you don’t file, they can go back forever.
  • The IRS may file a return for you that may be completely inaccurate or simply contain information that is prejudicial to you. For example, they will include income without offsetting expenses or capital gains without showing any basis in the sale.
  • The IRS is a mean sonofabich as a debtor and can garnish Social Security benefits or retirement plan income to recover taxes that you would not have paid had you filed!

Additional benefits of Form 2555

$91,000 is per person, so if you and a spouse each work, both will file the form. Also, Congress knows that many US corporations provide housing allowances to migrant workers (which they must include as income on their W-2) and therefore added an exclusion for housing allowances that is added on top of the current $91K. The trick is that the IRS determines the maximum amount of the exclusion based on the cost of living in the area where you live. If, for example, you live in Japan and your employer sends you to Tokyo, you get a total of $107,900 per day in allowances. On the other hand, if you send humble little Gifu, the maximum allowance you can exclude is $29,200. The full schedule is available in the Instructions for Form 2555 and makes for some fascinating reading; Especially if you are about to be posted to Moscow, Russia, and you want to know how the cost of living compares to your current post in Doha, Qatar. Plus, it makes for some great tax planning for foreigners employed by US corporations; Your HR person should claim up to your salary limit as housing allowance and everything after that is salary.

Form 1116 pits Robin against Form 2555’s Batman

If you’re a high roller and you max out your exclusion at $91,000 plus potentially up to $107,900 in housing allowances you can assume you’re going to pay your old Uncle Sam part of the pot. Not so fast, if you are a tax resident of a foreign country, it stands to reason that you must also pay taxes to your host country. This is where Form 1116 comes in. It basically gives a dollar for dollar tax credit for taxes paid to foreign governments. Of course, being the US tax code there should be about ten thousand restrictions on what you actually get the credit for, so check the instructions first.

Am I eligible to file Form 2555?

To be eligible to file Form 2555 you must clear two hurdles: first, your tax home is abroad and second, you must either be a bona fide resident of that country or have a physical presence in a country or countries. Outside the United States

The tax home is a foreign country

Your tax home is the principal country or jurisdiction where you conduct your business or employment. So it would be logical that you can have only one tax home at any one time and, to qualify for Form 2555, this tax home must be outside the United States for at least part of the tax period you are filing. for the

Bona Fide Resident Test

Once you’ve established that your tax home was a foreign country for at least part of the year you’re filing, you should proceed to see if you were a bona fide resident or if you met the physical presence test. As a general rule, you will choose to qualify as a bona fide resident if you had a foreign country as your tax home for the entire tax period and you are living in that country for a permanent or indefinite period.

Some factors that may be important to establish yourself as a bona fide resident:

  • the type of visa on which you entered the foreign country; Needless to say, tourist visas can raise some eyebrows?
  • Is there a visa limit? look up
  • Maintaining a home in America while living abroad? If so, disclose and explain. This is not a deal breaker but it may indicate that your intentions were less than permanent or of an indefinite nature.?

Once you have established yourself as a bona fide resident you are deemed to continue to be a bona fide resident unless you establish otherwise.

Physical appearance test

If you don’t meet the criteria to be a bona fide resident of another country, you can look at the physical presence test. To qualify, you must have lived outside the US for at least 330 days of any 12-month period in a row. There are lines on the form (line 16) that you will need to show in which countries you resided and on which dates. In general, the physical presence test will be useful for those who moved outside the United States but did not establish a physical residence in their home country on the first day of the tax year, those who were outside the United States but in multiple jurisdictions, and those who have jobs or occupations that take them outside the country but which are semi-permanent or of indefinite duration. failed to complete. An important point to note is that you have not met the 330 day requirement by the end of the tax year, but by the filing date with extensions. Also, you may be allowed a pro-rated amount of the exclusion if your period outside the United States extends to subsequent periods. For example, if you moved to England on July 1, 2009 and stayed there until July 1, 2011, you may qualify for half the exclusion amount for 2009, the full amount for 2010, and half the amount for 2011. As you can imagine, it’s more complicated than that and you may find that you don’t qualify for the exclusion during any of these periods. See the instructions in Form 2555 and Publication 54 for details.

Can I exclude income from my investments?

No, Form 2555 only helps with income earned from your employment or your trade or business when you qualify under the above tests. If you paid taxes on your foreign investment, you can take a credit for that on your Form 1116.

In conclusion, immigrant Americans have recently earned increased scrutiny from Congress and the Internal Revenue Service. For many Americans, however, avoiding unnecessary taxes can be quite straightforward thanks to the ability to exclude their foreign-sourced income on Form 2555.

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