The United States is one of the few governments that attempts to collect tax on its citizens, no matter where they may live in the world. However, for years expatriate Americans simply did not file returns, secure in the fact that they were under the radar and faced few consequences for not filing. This has all recently come screeching to a halt as the government is desperately groping for more revenue and many overseas taxpayers, who have failed to file for years, have received notices from the IRS reminding them that they are not forgotten back stateside.
The silver lining of this cloud is that the U.S. congress has given the expatriated (and reluctant) taxpayer two weapons to help fend off the avariciousness of the IRS, the Forms 2555 and 1116. For those actually living overseas, the 2555 is the big gun in the armory, as it allows a direct exclusion of certain income under certain conditions. Of course, it wouldn’t be U.S. tax law if it was easy to understand, and so I have included here an emphatically NOT by the IRS guide to the Form 2555.
How the Form 2555 Helps You
In its essence, the Form 2555 means that the first $91,500 of income (for 2010) that you earned while living overseas as a resident of a foreign country is subtracted back out of your U.S. income in your tax computation. For U.S. citizens who live abroad and who make the vast majority of their income through their labor but aren’t business tycoons, professional athletes, or investment bankers this may result in their U.S. tax return being a mere formality with no money due. “So Tyler,” you ask me, “I don’t make over 91 grand and I’m sure that I don’t owe anything, why should I have to expend the time and money that it would take to file?” I’ll admit it does seem unfair, but I have to warn that if you don’t file, the IRS can make up a return for you, and it won’t be in your favor!
The Pitfalls of Not Filing
- The statute of limitations never runs out! Except in the case of fraud or tax evasion the IRS can only audit a tax return three years from the date of filing. If you don’t file, they can go back forever.
- The IRS can make up a return for you that can be totally erroneous or only include information prejudicial to you. For example, they will include income without the offsetting expenses or capital gains without showing any basis on the sale.
- The IRS is a mean sonofabitch as a debtor and can garnish social security benefits or retirement plan income in order to pay back taxes that you probably wouldn’t even have owed if you only would have filed!
Additional Benefits to Form 2555
The $91,000 is per person, so if you and the spouse each work then both will file the form. Also, Congress is aware that many U.S. corporations provide housing allowances for expatriate workers (which they then must include in income on their W-2) and so has added an exclusion for housing allowances which is added on top of the extant $91.5K. The trick is that the IRS determines the maximum amount of the exclusion based upon the cost of living in the area that you live. If, for example, you live in Japan and your employer sends you to Tokyo then you get an allowance of a whopping $295.62 per day for a total of $107,900 per year. On the other hand, if you get sent to humble little Gifu than the maximum allowance that you can exclude is $29,200. The complete table is available on the instructions for the Form 2555 and makes for some fascinating reading; especially if you’re about to get sent to Moscow, Russia, and you want to know how the cost of living compares to your current post in Doha, Qatar.
Form 1116 Plays Robin to the Form 2555’s Batman
If you’re a high roller and you’ve exhausted your exclusion of $91,500 plus potentially up to $107,900 in housing allowance then you might figure that you are going to owe your old Uncle Sam a share of the pot. Not so fast, if you are a tax resident of a foreign country then it stands to reason that you also owe tax to your host country. This is where Form 1116 comes along. It basically gives you a dollar for dollar tax credit for taxes paid to foreign governments. Of course, being the U.S. tax code there has to be about ten thousand restrictions on what you actually get the credit for, so check out the instructions first.
Am I Eligible to File Form 2555?
To be eligible to file Form 2555 you have to clear two hurdles: first, your tax home is in a foreign country and second, you have to either be a bona fide resident of that country or have had a physical presence in a country or countries outside of the United States. This gets tricky, so stay with me.
Tax Home Is a Foreign Country
Your tax home is the principal country or jurisdiction in which you carry out your business or employment. It would therefore be logical that you can have only one tax home at any given point in time and, to qualify for Form 2555, this tax home must have been outside of the United States for at least a portion of the tax period you are filing for.
Bona Fide Resident Test
Once you have established that your tax home was a foreign country for at least a portion of the year that you are filing for, then you must move on to see whether you were a bona fide resident or you meet the physical presence test. As a generality, if you had a single foreign country as your tax home for the entire tax period and you were residing in that country for a permanent or indefinite period of time then you will choose to qualify as a bona fide resident.
Some factors that could be important in establishing yourself as a bona fide resident:
- Type of visa you entered the foreign country with; does it need to be said that a tourism visa may raise some eyebrows?
- Visa limit stay? See above
- Maintain home in US while living abroad? if so disclose and explain. This isn’t a deal breaker but it could signal that your intention was less than that of a permanent or indefinite nature.
Once you have established yourself as a bona fide resident than it is assumed that you continue to be a bona fide resident until you establish otherwise.
Physical Presence Test
If you don’t meet the criteria for being a bona fide resident of another country, then you can look to the physical presence test. To qualify, you must have lived outside the US for at least 330 days of any period of 12 months in a row. There are lines on the form (line 16) that you will need to fill out showing what countries you were resident in and for what dates. Generally, the physical presence test will be useful to those who have moved outside of the United States but were not established in their country of bona fide residence as of the first day of the tax year, for those who were outside the U.S. but in multiple jurisdictions, and for those who have a job or vocation that has taken them outside the country but who fail to meet the semi-permanent or indefinite period requirement. An important point to note is that you don’t have to have met the 330 day requirement by the end of the tax year, but by the filing date, including extensions. Also, if your period outside the United States extends into subsequent periods then you could be allowed a pro-rated amount of the exclusion. For example, if you move to England on July 1, 2009 and stay there through July 1, 2011 then you could possible qualify for one half of the amount of the exclusion for 2009, the entire amount for 2010, and one half for 2011. As you can imagine, it is much more complicated than that and you might find that you don’t qualify for any of the exclusion for any of these periods. See the instructions to Form 2555 and Publication 54 for details.
Can I Exclude Income from My Investments?
No, Form 2555 only helps for income earned from your employment or from your trade or business while qualifying under the tests above. If you have paid tax to another government on your foreign investments then you may be able to take a credit for that on your form 1116.
In conclusion, the expatriated American has recently earned increased scrutiny from Congress and the Internal Revenue Service. For most Americans, however, avoiding unnecessary taxes can be a fairly straightforward matter thanks to the ability to exclude their foreign sourced earned income on Form 2555
Please leave your questions or offer your solutions below. As the WebCPA and the author of WebBizFinance.com, my job is to help you grow your business and solve your business finance and accounting problems!
Tyler Wells, C.P.A.
I’ve read all of the questions and answers above, and I hope I’m not repeating anything…
I am a free-lance musician, and I worked in Germany, Italy, France, and the UK in 2011. My total income from those jobs was about $40,000, and I spent about 102 days (combined) in those countries.
My question is how to complete the 2555 form so that it reflects all of the countries and companies. I’m trying to do my taxes on the H&R Block Premium program, but it isn’t very helpful…
I appreciate any info you can give me!
If someone lives overseas and files the 2555, can they use a US mailing address on the 1040 (to receive mail in the US) even though the address on the 2555 has the foreign address where they actually live?
Absolutely, as you indicated, line 1 of the Form 2555 is your foreign address. The 1040 itself, however, can have a U.S. address. This is actually rather common as many expats use a mailing service to consolidate their mail (thanks Mom!) and send it electronically.
I would really appreciate your comments about the following tricky question:
Publication 54, page 33, example 2, and Form 2555 instructions for Line 44 indicate that Schedule C business expenses reduce the amount of FEIE you can claim, dollar for dollar. The instructions indicate that the larger your business expenses are in relation to your GROSS Schedule C sales receipts, the lower is the portion of FEIE that you can claim. So if your business net profit margin is for example 5% (95% of gross are expenses), that you can only claim 5% of FEIE.
This seems very strange. Why can’t FEIE simply be applied to the total NET profit (Line 31, Schedule C) regardless of the GROSS income (Line 7, Schedule C) and regardless of the legitimate business expenses that are connected with earning it? Under which circumstances can I leave these Schedule C business expenses out of the amount reported on Line 44, Form 2555?
First of all, the Schedule C is generally the wrong way to go for an overseas based taxpayer. I don’t know where you are based or what your activity is, but generally taxpayers incorporate in their host country (or even a third country) and then run their activity through this corporation. Only the dividends and wages that they take out would then be subject to US taxes. This gets tricky because it depends on local tax law and balancing US with local taxes.
Now, let’s say for 2011 that you are already committed to the Schedule C, or that you have another reason to use the Schedule C. You are absolutely correct; the exclusion is taken on the gross revenue, not the net profit. The expenses must then be pro-rated by the amount of income excluded and then your exemption is reduced by that amount. You are correct again in that this is absolute madness and makes no sense; it arbitrarily penalizes businesses with lower margins, like retail. So you have situation in which Mr. A has $150,000 in sales and $100,000 in expenses for $50,000 in profit and receives a partial exclusion but Mrs. B has $75,000 in income and $25,000 in expenses for the same $50,000 net income but receives a still greater exclusion.
Many thanks for your reply, Tyler. I thought so and want to incorporate right away. I do realize that I will have to file both Schedule C and corporate tax form based on partial income/expenses allocation in 2011. Since I am not a bona fide resident in any foreign country, and not a tax resident in any foreign country either (spend my time between several countries not becoming a tax resident in any of them, work through internet) and will claim FEIE based on physical presence test, I believe the simplest would be to incorporate in New York (where I am from). How can I arrange incorporation itself as well as do everything I will need to do as the C-corp owner – the W-2 payroll to oneself with FEIE in mind, all statutory filings, corporate records, minutes, meetings and resolutions, all correspondence, sending, receiving and forwarding mail from/to my official corporate address in NY, etc., etc. – how can I set all this up and run it from abroad? And another question – how does one transfer the assets and liabilities of existing sole proprietorship in the middle of tax year to the books of C corp with future tax minimization purposes?
Shar,
Great questions, but incredibly beyond the scope of what I can offer from the blog. First, most small business owners avoid incorporating as that means that you would pay tax at the corporate level and then again when you take the money out as dividends. Also, a corporate or even LLC, entity would get no benefit from the foreign income exclusion, as these entities do participate. There are other incentives, depending on what your industry is, and these entities do offer legal protection, but that is something that you would need the advice of a lawyer on.
Now, could you incorporate, pay yourself out most of the profits as wages, and then claim the foreign income exclusion on the wages? Yes (assuming you qualify), however excessive wages are an area that the IRS watches closely, and this may be a concern in the long term if your income tends to fluctuate. This does have potential because you would then be able to take full advantage of the exclusion on the wages that you take out, without having to add back the expenses like on the Schedule C. You would have to pay payroll taxes quarterly and would be responsible for both the employee and employer portions, without the deduction of 1/2 that you would get through filing on the Schedule C.
As far as the logistics of handling everything while abroad, I really don’t see that as being a problem. I don’t know about New York law and what requirements it would entail (not that you would necessarily need to incorporate in New York), but the federal and payroll requirements can be handled online or with the help of a competent accountant. If you decide to incorporate partway through the year then you would just have a Schedule C portion for the portion of the year up until you incorporate and a separate Form 1120 for the corporation for the rest of the year. The accounting for a corporation is more complex, as you need full financials and not just the income statement to file.
In sum, your idea is interesting but unorthodox. I would advise getting further advice and weighing the pros and cons as they apply specifically to your business. I would love to hear back from you to learn what you decide. Thanks for some challenging questions!
Tyler, we’ve been in country about 8 months now and are researching tribal groups now to live and work with. We have a few invitations, but are weighing through some things. Currently, I don’t think any of these language groups we are considering have more than 2,000 speakers, and a few only have 200 – 300. You can consider yourself as having a free place to sleep should ever come to “The Land of the Unexpected.” Thanks so much for your help.
Tyler, I’m a little lost with this form. What is the difference between lines 22e and 34?
Here is my situation: The company I work for pays me COLA and a Housing allowance which is already included in my salary, which means I’m taxed on it. So on line 22a I enter the COLA and 22e I enter the total housing amount the company paid me for the year.
What confuses me is why on line 34 it appears that I’m repeating the same information. Line 22e adds the income to my salary (doubling what is already been added) and line 34 appears to be removing line 22e. Am I doing this right??
Thanks for your help.
Lines 1 through 23 are just a long-winded way of including all your foreign earned income. Obviously, any amount in 22e would be included in the total on line 24, and eventually find its way to line 27. Usually, line 34 is just line line 27 unless you have some self-employment income that would be excluded from line 34. So you are partially correct, you are repeating it but the purpose of line 34 is only to pro-rate the Housing Exclusion to the portion that is attributable to employer provided income (i.e., exclude self-employment income). So if all of your income is from an employer then line 34 will generally equal line 27. As a further note, assuming that you worked all year for the same employer and that employer is a US based employer that issues you a W-2 then line 24 will generally equal line one of your W-2.
I moved to Papua New Guinea in May of 2010. I have not been in the country for 330 days yet, but I understand that I can still file the Form 2555 due to the prorate, as I will be in this country with no leave for probably the next 3 or more years (my family and I are missionaries here.) However, my question is this: On line #16 of this form I am supposed to list the dates for the 12 months I’ve been in country and there is no single option to show the prorated dates. How do I fill this part out? Do I simply put the date that I arrived in country (May 9, 2010) and the anticipated date that I will leave (Feb. 2014)?
Thanks so much for you help.
jm
JM,
What you need to do is extend the return until you have met the 330 days Physical Presence Test, and then you would indeed, as you suspected, receive a pro-rated amount of exclusion. So, assuming you meant that you moved to PNG in May 1, 2011, you would get about 8/12*92.900 maximum exclusion. My guess is that this amount will be sufficient to exclude the income that you made as a missionary. Remember, the foreign income exclusion would not apply at all to the income that you made back in the States before you left. The pro-ration is done on Part VII, line 37 of the return (and above in Part VI if you are claiming the housing exemption). Line 16 of your Form 2555 would then read “from 05/01/11 through present.”
Also, as a missionary you will have to face the decision as to whether you will opt out of the social security system or not. If not, you will owe self-employment tax (assuming that you aren’t earning a wage) on your earnings, even though they are excluded from income taxes. If you were a pastor or religious leader before, you have already made this decision. It gets complicated, but I always advise clients to think twice and weigh the options before opting out.
On a personal note, I am in awe of you. I am going to imagine you up in the highlands receiving pigs and taro as offerings and learning a language that only has about 10,000 speakers in all of the world. Please don’t try to discourage my fantasy, I’ve always wanted to visit PNG and the Solomon Islands.
Tyler,
I came across your site here and reading the Q & A helps. I would appreciate it if you could advice on my situation.
My retired husband gets income as a visiting professor since Jan 2010. For the tax return 2010, we filed our joint return and included the annual foreign income of about $54,996. I have a couple of questions.
1. For 2010 income, eventhough it is said that foreign income less than $91,000 is exempted, however, when we filed our 2010 return through our accountant, we were shocked when we had to pay a higher tax for
year. I’m still confused to know that our tax bracket jumped from 15% to 22% and that resulted in the higher tax payment for 2010.
2. For 2011, my husband continues his visiting professorship until Dec. 2011. However, we came back to the US in May 2011 for family time and flew back to Malaysia to continue visiting professorship in early
September until the end of the year. How do we go about filing our return for 2011?
Sharifah
Hello Tyler,
Great forum and thank you! I have a question about Form 2555 and accounting for related business expenses as a sole-proprietor/self-employed person: I am a US citizen who has lived abroad for many years and am filing for the first time as self-employed as a consultant. When filing my income subject to FEI do I need to subtract my business expenses off this first before entering this on line 20a? On my 1040 line 7 is empty since I only have self-employment income (correct?) and on 1040 line 12, essentially my self-employement income minus expenses are input as the resulting “Business Income (or Loss)” as per Schedule C (Profit or Loss From Business). In the Instructions for Form 2555 I cannot find anywhere that I would have to reduce the amount of foreign income (consulting fees) with any of the expenses I have made, and if so where or how should I do this. Can you help clarify?
Thanks!
Hey Alex, I believe you are saying that you would carry your self-employment income from Schedule C to line 20a of Form 2555 and you would be absolutely right. Since the amount carried to line 12 of your 1040 and to line 20a of Form 2555 from line 31 of your Schedule C would be net of all expenses, that issue is already taken care of. Don’t forget that the income is subject to US self-employment tax and that amount from line 31 of Schedule C must be taken to Schedule SE as well. However, if your country of residence has a totalization treaty with the US you would not be subject to the self-employment taxes.
Hello Tyler,
You’re a Jem! I am a US citizen, a resident of Germany for 23 years.
After 19 years I lost my job and collected unemployment from Germany. Do I have to report this income to the IRS? If yes, can I use form 2555?
During unemployment I started my own consulting business. Just me, no employees. Germany assists people on unemployment who want to start their own business by paying a portion of the unemployment benefit during the first 6-9 months of start up. For this year I have two incomes; part unemployment and part my self employed income earned. What forms do I need to file?
And lastly, can you please explain what it means to “revoke” the foreign income exclusion.
Thank you kindly,
Evy
Evy,
Alas, your problem with German unemployment is beyond the scope of my abilities. Generally, it is not considered unemployment for US tax purposes and may or may not be earned income depending upon how the unemployment is done in Germany. I would need to know more about how the German system works but I suspect that it would be included on your return on line 21 and would not be eligible for exclusion under using Form 2555 nor would it be subject to self-employment taxes.
Your self-employment income is much easier to deal with. You would include on a Schedule C of the 1040 and then exclude it using Form 2555. Now, generally you would be need to pay the self-employment tax but Germany has a totalization agreement with the US and so you would carry the income to the Schedule SE but then 0 taxes and mark “Exempt per Totalization Agreement” on the schedule.
My Son in law Tony is US Citizen. My daughter & granddaughter are both Canadian Citizens. All 3 reside in Canada. My son-in-law works exclusively in Canada. It has just come to our attention that he must file tax Returns in the US. I have read all the forms, and I am clear on forms 2555 report my income, and 1116, claim my tax credits, (thanks to you) But it is not clear to me, on Form 1040 if Tony can claim his wife and daughter as dependant, as he does on his Canadian Income Tax? And would he be filing jointly? even though my daughter is Canadian? I can’t seem to wrap my head around this one??
I apologize for the long delay in responding and hope that this answer still is of use to you. Generally, taxpayers who are married to foreign nationals and live exclusively abroad tend to file married filing separately. Now, if his wife doesn’t work, doesn’t have any income, and never plans on having any there may be a situation in which it would be advantageous for file joint but most spouses would rather stay away from the madness that is the US tax regime. He can claim his daughter as a dependent if she meets the normal requirements.
I have just finished their return – thank you so much for your help. Actually I think my daughter in law is OK because she is working on their Asian clients – has been to China 5 or 6 times, Bangladesh, Japan and Hong Kong – so she really is working for them on clients that are located in Asia. I guess I was super conservative when reporting their income and did pay self employment tax on all of the income he made in Vietnam – he wanted to do that. But from what I understand his employer will soon begin withholding Vietnamese payroll taxes on his earnings. I cannot even begin to think of that right now – I will wait for another day!! I do have an accounting background – passed the CPA exam many years ago but the last 25+ years of my life was spent working as controller for a college and I have not kept up with income tax laws and certainly was not at all versed in tax ramifications of working overseas. This has been a learning experience. I am going there to visit them in January. 2011 should be a little more straightforward – they willl qualify as bona fide residents I am almost sure. Thank you again!
OMG – you are a lifesaver. My son and his wife moved to Vietnam in October 2010. She is working as an independent contractor for the PR firm she worked for in New York City – they are paying her on a 1099. Until October 2010 she was paid as an employee and has W2 for those earnings. My son had limited earnings in 2010 while in NY as he was in school. He did have some consulting revenues from US firm for which he received a 1099. He continued to work a little for this firm while in Vietnam – and they reported his earnings on his 1099 – so that his 1099 from them includes about $10,000 fees paid for work done while living in US and about $4,000 paid for work done after moving to Vietnam. He went to work full time for a company headquartered in Bangkok with offices in various cities in Asia and one office in US. He received no tax document from them but wants to report the income.
Finally here are my questions. I have completed their tax return, showing income earned by wife after in Vietnam and paid on 1099 as self employment income and completed form 1040 SE for that. I believe her income earned for Oct Nov and Dec will not be taxable for fit as she will be able to exclude it based on the physical presence test. I did complete the form 2555 for her Is this correct so far?
I completed a form 1040 SE for my son including all income he earned both as a consultant during the time both in US and Vietnam (paid from American firm) I also calculated self employment tax for the earnings he received for Oct Nov and Dec from the firm he works for in Thailand. Is he liable for SE tax for thos earnings – he is considered to be an employee I believe. He actually wants to pay social security on these payments but I am curious as to if it is required. I believe that all his earnings received while in Vietnam are excludable from federal income tax due to physical presence test. I completed form 2555 for him to reflect that. Not sure if that is correct
This is a basic question – but in completing form 2555 I am confused as to what goes on line 18 of part III of the firm. Am I supposed to include dates of residency in all countries during their twelve month periods – including Vietnam, United States and they were both also in Phillipines, China, South Africa and Cambodia. Or do I just include countries other than the US>
Thanks so muchg – you provide an amazing service
Pam
Pam,
Great question and one that I am getting it more and more due the the increasing numbers of workers who are choosing to commute from home, and often choose that home to be in Europe or Costa Rica or anywhere in the world. If you are a US citizen or permanent resident and are working for a US company in support of their US operations then your earnings cannot be excluded from US taxes using Form 2555, whether or not you meet the physical presence or residency tests. If your employer gives you a 1099 (or W-2) then you had better be ready to prove that it was in support of operations outside the US because that is a huge red flag and almost certain to earn a notice. I would say that you would most likely report each of their 1099 earnings on a Schedule C and then report the net income on the Schedule SE and pay the self-employment taxes. Now, this doesn’t mean that they wouldn’t be able to deduct most of their expenses in providing the services (computers, internet, cell phones, if applicable). This is important, for US sourced income where your son and daughter-in-law are living is irrelevant.
Now, say that the conditions of their work required them to be outside of the US (doing research that could only be done in Vietnam, for instance), then the company never should have given them a 1099 for this work but I would still include it on the 2555 and exclude from US income taxes. Be prepared to argue your case with the IRS, however. This income would certainly be subject to self-employment taxes and they would get the credit with Social Security.
Your son’s income from his Vietnam employer would indeed be be eligible for the exclusion, assuming he meets the physical presence test, and he could report and pay self-employment tax on the Form SE and get the credit, but doesn’t have to if the employer is a Vietnamese company and not just a Vietnamese subsidiary of a US company.
Finally, with line 18 of the Form 2555 what they are most concerned about is travel to the US, as that could determine whether or not the taxpayer qualifies under the physical presence test. Trips to neighboring countries, in your case China and Cambodia, can be omitted.
I hope that I answered your questions and best of luck. It is a brave mother that would prepare her children’s expatriate tax return and I hope that they really appreciate what you are doing!
Thank you so much Tyler. I’m pretty sure this is correct as well. Hope I’m right.
Thanks again,
Ehrin
Hi Tyler. I am in a nightmare and feel the whole world is coming down. I hope I have a simple case and that you can confirm with me that I am doing things correctly.
2006,2007&2008 I was an English Teacher working for a Vietnamese owned English Language School in Hanoi. I now know I need to file those years so I am getting started. I filled out my 2555 Form and put the deduction on line 21 (a negative number) for my 1040. I ended up with zero. I think this is good
I put my annual wages from my job on line 7 of the 1040, but in VN they have no W2. So I will attach and include my pay stubs when I mail everything to the IRS. Is this correct?
I go through the rest of the 1040 and every line seem to be zero as well. I was not Self Employed, owned anything or had any other income of benefit so I hope this is correct as well?
I know I don’t have to pay Income tax(zero from line 22 on 1040) and I’m hoping to not pay SS or Medicare as well. So my question is, if line 22 on 1040(total income) is zero and I have no investment, property or any other income then all the lines below should be zero?
Will this ensure that I will not have to owe a payment to Social Security or Medicare?
Thank you again for your time and expertise,
Ehrin
Hello Ehrin, I’m no Atlas but hopefully I can help keep your world up. For starters, yes, if you fall under the exclusion amount and if you have only earned income from your foreign employer then you should have a negative number on line 21 that brings line 22 to 0. Further, if your employer is a foreign employer with no ownership by a U.S. citizen or entity then you would not owe any social security tax as well (see here for complete requirements . In that case all other lines would be 0. I hope that this helps,
Tyler
Thank you so much Tyler for your quick and helpful response. The decision to file was entirely mine, I started working overseas in 2003 and didn’t know at the time that I needed to file. In 2007 I received a letter from the IRS asking for my 2006 return, I have since filed 2006 to date- I am now back in the US and though the IRS did not contact me for 2003-2005, I just wanted to get my record in order, so I don’t have to always wonder if the IRS will ever contact me or not. You’re right about the nightmares of wondering whether you’ve made a mistake or not, but I just think that my case is pretty simple since I earned far below the exclusion and i am not taking any foreign housing exclusion. Would you know a reliable proessional that I can hire all the same?
Thank you and kind regards,
BJ
Thank you for the good work that you are doing on this site. I have 2 questions:
1. I have to file form 2555 for 2003-2005 and was wondering if it is advisable to use the services of a tax professional. I have read all the instructions and everything seems straightforward to me, but a friend mentioned that it always better to use a tax professional- what do you think?
2. I qualify for the physical presence test in the first year and bona fide residence test in the 2 additional years- can I claim physical presence in one year and then bonafide residence in the two following years?
Thanks a lot
BJ,
I’m curious as to why from 2003 – 2005; did this come about through contact with the IRS? Usually, if someone hasn’t filed for some time and wants to make amends and catch up the rule of thumb is to go back 6 years. As to your first question, I put this article out to help the do-it-youself types but certainly sometimes it is better to hire a professional. It really depends on whether: one, how well you can withstand the incredible mental anguish that preparing US tax returns causes, and two, how willing you are to risk making a mistake. As to your second question, certainly, in fact, it is very common for someone to move from meeting the physical presence to the bona fide residence status.
NOTE: Please ignore my previous question (submitted twice) from Friday, October 22nd, 2011 at 2:13 pm.
I misread the information about multiple employers and Form 2555. You were very clear about submitting only one 2555 in your September 5th advice to George. So I’ve got that.
I have a much better question to put forward to you, now, if you’ll permit me!
===
Hello Tyler,
I’ve been overseas as a legal resident of the United Kingdom since 2000, and have a couple of questions about exemption from self-employment tax, and required documentation. I earned $1,900 self-employed, and about $26,000 from regular employment.
I see in the questions and answers above that self-employed people abroad must complete Schedule C, but in certain countries do NOT have to pay self-employment tax; they either:
* have to go to Schedule SE, subtract the income back out again and include an explanation (As you wrote to Jennifer, Sept 8th)
* no need to attach Schedule SE but I would put a note on the form or on a schedule to the form that you are exempt from self-employment taxes (as you wrote to Catherine, October 10th)
How would you word that explaination? Is this adequate: “I am exempt from self-employment taxes due to the US/UK totalization agreement.”
Why does Jennifer need SE, but Catherine doesn’t? Is that because Jennifer might be using tax-prep software?
You wrote several people that for Australia and Canada, there are totalization agreements that exempt one from paying social security to the United States. The SSA websites lists such countries, and the United Kingdom is on the list since 1985: http://www.ssa.gov/international/agreements_overview.html
The SSA website says under its “certificates of coverage” that one must obtain a certificate from the foreign authority, and “attach a photocopy of the foreign certificate to his U.S. tax return each year as proof of the U.S. exemption from self-employment taxes. In accordance with Revenue Procedure 84-54, the foreign certificate serves as proof of the exemption from U.S. Social Security taxes for the period shown on the certificate.”
That seems more involved than the simple explaination written above, but you seem to imply that the IRS is less fussy about having such a document attached to a 1040, despite what SSA says. Can I go ahead and submit a return without an official certificate from UK authorities?
Thanks,
Geoff
Hello Geoff,
As you have noted, there is a lot of grey in the area of submitting SE with Schedule C income. If you qualify to not participate in Social Security because you are currently participating in a plan with a country that has a totalization agreement with the United States, then you have every right to exclude your Schedule C income from self-employment tax. The easiest solution is to just carry the amount from the Schedule C to the Schedule SE and then back it out and write something along the lines of what you put above. It would not hurt to attach the “certificate of coverage” to the form but in practice I don’t belie that this is commonly done. Since most of the forms that I have filed are now e-file I instruct the taxpayer to be ready to prove their exempt status is questioned by the IRS. My experience with the IRS is that they very rarely ask to see anything. I hope that this helps.
Hi Tyler,
Thank you for your response. For the past few weeks I’ve been going through all my 2555 and 1116 calculations, and finally am getting to Schedule SE.
It’s hard to see which line on SE I would use to “back it out”… Short Schedule SE just doesn’t have much space, and on either Short or Long SE it isn’t clear where I should put a negative number, and make it all come out to zero.
I’m thinking I should not complete Schedule SE, because it just seems weird.
Instead, I’m thinking:
1. I’ll fill in Schedule C
2. on Form 1040, line 58 I’ll enter “EXEMPT, SEE STATEMENT 8″ and then statement 8 will say “I am exempt from self-employment taxes due to the US/UK totalization agreement.”
Your thoughts?
Many thanks,
Geoff
Hello Tyler,
I’ve been overseas as a legal resident of the UK since 2000.
I see a few places where you mention filling out a separate Form 2555 for each employer. This year I have 3 employers.
However when I get to Part VII “Taxpayers Claiming the Foreign Earned Income Exclusion”, it’s unclear how I’m not giving yourself a $91,500 exclusion PER-employer. That’s clearly not the intention of the exclusion.
How should I “spread around” the exclusion between different employers, while still completing the forms 2555 correctly?
Just to be clear, for the entire year I have $12,900 in income from A, $12,700 from B, and $1,900 from C. That’s a total of less than $30,000 combined, so this not a matter of paying or not-paying tax, and more a matter of correctly completing the three different 2555 forms.
Just to add a twist, the $1,900 from C was actually from me giving private tutoring language lessons, which I suppose would be self-employment. Do I really need to do a Schedule C and pay self-employment tax (FICA is it?) for this? What if I just put it down as wages, and didn’t deduct any expenses from it?
Tyler,
I have another question for you. My job was pushed back until the first week of November. My understanding of the 330 day rule is that it includes extensions. Now if I don’t leave until Nov 1st, and the latest extension I can request is Oct 15th does that mean I’m out of luck using the 2555, as I won’t qualify for the 330 day rule? This is becoming very complicated even though I intend on using a firm for my taxes.
Thanks for your time.
Tyler,
As I work through preparing the u.s. returns for dual citizens canada/u.s., i am faced with a new dilema I hope you can help me with. 2 of my clients own/run either a corporation or sched c business. I am waiting for verification. And 3 of them are shareholders in either an S-corp type entity or trust. I was recently told I would need to prepare forms 3520 and 5471. Any light you could shed on this would be greatly appreciated.
Best Regards,
Rhonda
Hi Tyler
I will be negotiating my expat package soon and anticipate that my salary and housing allowance together might be close to the foreign income exclusion plus housing allowance limit, although the breakouts might differ. What should I make sure HR does in terms of the split to ensure I maximize the exclusions. How should it look in my w-2 or any other tax document. And does it make any difference if the housing allowance is paid directly by the company to the landlord or if it’s paid to me and I administer it myself.
Also are there any tax treatment issues to be concerned about with the salary being paid either to a US account or paid to my foreign account. Any idea what is the norm here and what is the beneficial arrangement for the expat.
Lastly will I need to include any US rental income from renting my US home while i work abroad. How will this income be treated for tax purposes, and if my spouse and I jointly own the home can I still accrue the rental income solely to her tax return?
Long list of questions thanks so much
Thanks for writing Jerry, great questions!
First of all, if you are above the income exclusion limit then it usually is beneficial to structure some of the compensation as housing or cost-of-living allowance. You still have to include it in income but you can increase the amount of the exclusion. It makes no difference whether the money is paid to you or to a third party and the amount is usually shown as a separate line on the W-2 or the foreign tax document.
As far as US taxes are concerned it makes no difference whether the money is deposited into a foreign or US bank. Most people on shorter assignments, or who move around a lot or want to keep some money in the United States keep their money in a US bank and then just transfer the money as needed. Those in it for the long haul usually don’t bother with this because there are transaction costs involved.
The rental income would be included on the return exactly as if you were in the United States (on Schedule E as passive income) and can really be a pain to account for. If you are married filing separately and you jointly own the home and you actually receive at least some of the income then yes, you should allocate the income between the two returns. If it is a substantial amount of money then you may wish to consider getting advice as there are a number of issues relating to structuring the rental and complying with your tax requirements.
Tyler thanks for your response.
How about foreign social security program contributions that are mandatory and deducted directly from one’s salary? How does that amount get treated for USTax purposes, will I be able to exclude that amount from my income total and foreign income exclusion? From your experience how have you seen US companies structure this payment where the both the employer and employee have to fork out for the foreign social security contribution. From what I understand the way the program works where I’m heading is that employee deducts from salary and employer pays out of pocket but I’m unsure how US companies typically lay this out for their expats?
Thanks for your help.
My friend split up from his wife and took a job for a US company overseas. He’s been overseas since 2009, but receives a w-2 from his US company with federal and state withholdings. Shouldn’t he be entitled to the foreign income exclusion? He has no home back in the US after the divorce and maintains a residence in the host country. He does not get any help from his employer on the housing, so he’s paying for the cost of maintaining a residence overseas. Can he take the housing exclusion?
That really depends. If he has been sent overseas by his employer, say, working at an overseas branch, and he is performing his labors overseas then it does sound like that would be the case, assuming he meets one of the two residency tests. On the other hand, if he is merely telecommuting while living abroad then it is possible that he is not eligible for the exclusion, as the income is US sourced. He would really need to get this straightened out with payroll, since his chance of taking the exclusion while receiving a W-2 would be pretty slim.
I’m still working on 2010 taxes, my first time filing form 2555. What is confusing me is how to fill out my 1040. I’m a self-employed, bona fide resident of Canada (I’m a dual citizen) Given I don’t have to pay social security, etc because of US/Canadian totalization? agreements, how do I fill out schedule C and SE and the 1040 form? With zeros?
With much gratitude for your site.
Catherine,
You would fill out the Schedule C in its entirety and then that income would flow through to Form 2555 to exclude it from US taxes. There is no need to attach Schedule SE but I would put a note on the form or on a schedule to the form that you are exempt from self-employment taxes due to the US/Canada totalization agreement. I hope that answers your question.
Hope you can help, as I’m confused. I’ve lived overseas for years, filing Form 2555 with no problems. For the last 5 years, I’ve been a majority shareholder of a foreign company, whose financial returns I also file with the IRS. So I think i’ve been doing things right until now.
The question is this year – 2011 – I received $90,000 income from a US-based company for consulting work I did while overseas. I plan on reporting that to the IRS but my tax accountant says I’ll owe $14,000 of that to Social Security. Does that seem correct to you? I had always assumed that it would fall under my $91,000 exclusion amount and wouldn’t be liable for any taxes or other payments on it.
Appreciate your help in advance.
Carol M, unfortunately the exclusion does not apply to the self-employment tax and therefore, yes, you probably do owe the money. The exception to this may be if your host country has a totalization agreement with the US to eliminate double coverage of social security. Basically, if your country of residence has such an agreement and if you participate in your host country then you may have an out. Another possibility, although it would be too late for the prior year, is to structure the payments so that you set up a corporation that takes the payments and then pays you a wage to do the work. Without knowing the specifics of your situation I couldn’t tell you if either of these options would work for you, but it is worth investigating.
I am a missioner working in Tanzania since Jan 5 2009. I met the physical presence test in 2009. I meet the Bonafide resident test for 2010 and 2011. I am planning my return to the US. If I have a 30 day home leave in May of 2012 and return home permanently on Nov 30 2012. Will we eliminate or ability to use the foreign income exclusion.
George O,
First of all, thank you for what you are doing and I tip my hat to you, sir. Second of all, since you were already a permanent resident in the prior year, you will be able to prorate your exclusion from income in 2012 for the portion of the year that you were abroad and by the portion of the income that you earned while abroad. The idea is that none of the income that you may earn once you get home (or even while you are visiting home) can be excluded on Form 2555, but all of the income earned abroad should be (unless you are an extremely well paid missionary). Please let me know if I can be of any further service.
Canada has a registered disability savings plan to help people with disabilities. I am assuming any income earned in this plan will be taxable in USA on a current basis as it is deferred in Canada. The government of Canada also deposits matching grants up to $3,500 per year and up to $1,000 per year into the plan. Do you know if these grants/bonds are taxable currently also?
Additional information
The lifetime contribution limit for an RDSP is $200,000, with no annual limit. Anyone can contribute to the RDSP with the written permission of the plan holder.
Contributions are not tax-deductible and are not included in income when paid out of an RDSP.
Investment income earned in the plan accumulates tax-free. However, grants, bonds, and investment income earned in the plan are included in the beneficiary’s income for tax purposes when paid out of the RDSP.
George,
Your right about the first point, deferred income investment programs that are not specifically in compliance with US code are taxable income in the year of the deferral or of the matching contribution, even if they are tax-deferred in the country of residence. It would then follow that earnings would also be taxable in the year earned, which often makes keeping records for US tax compliance difficult. I was not familiar with the RDSP and therefore did some research and looked at the US/Canada tax treaty to see if I could find anything that may make an exception for it but I could find nothing. Therefore, it is my belief that, for US tax purposes, the contributions should not be excluded from income, the matching contributions from the government should be included in income, and any earnings from the investments should be reported in the year earned. Conversely, removing the funds from the plan would be a non-taxable event. I hope that helps, Tyler
Tyler,
Any reason why a full 12 month period of a bona fide foreign resident can’t be reported on 2555-EZ? Seems such a straight forward form when using the Maximum foreign earned income exclusion.
Thanks
I am a bona fide foreign resident. I own my home in my foreign country therefor I do not pay rent. Do I get Housing Exclusion and/of Deductions by being a ‘homeowner’(Line 28)
Mark, maybe, I don’t know enough about your employment status to know for sure. The rule is “Eligible housing expenses include rent, the fair rental value of housing provided in kind by your employer, utilities (other than telephone charges), real and personal property insurance, rental of furniture and accessories, repairs, and residential parking.” Therefore presumably you would not have rent but would have some of these other items. However, clearing the $14,016 threshold may be difficult. In addition, if you have mortgage interest then you may be able to deduct that on Schedule A.
Tyler,
I’m a U.S citizen living in Canada for 23yrs have not filed for 23yrs in US, so I will file for 2010 and hope that’s enough, the previous yrs. Didn’t know I was supposed to file! for 2010 my income was $16,850.00 for being an empoyee and income tax was deducted, $10,475. was for self employment, do I combine the two on line 7 of 1040 or seperate them line 21 “other income” also I will fill out form 2555 but since my total income is lower that 91,500. will I put a negative amount on line 47 and 50?(64,175)??
also should I claim my children as dependants on my us return if my Canadian husband, claimed them on his tax returns already? I read that I will not have to pay SS to US in the form of self-empoyment tax since I’ve already paid it to CRA, is that true? Thanks so much for your site, it has been a big help.
You’ve got lots of company Jennifer, we are daily getting communications from US citizens and joint nationals living in Canada. I am reading your first question as being that you have $16K as income from being an employee and $10K in income from being self-employed, is that correct? If so, the income from your job goes on line 7 and the income from self-employment goes on line 12 and you will have to attach a Schedule C.
Second, no, the exclusion on the Form 2555 cannot go below the amount of foreign earned income reported. If so, you have an error on your 2555.
Third, by all means you may claim your children, your husband’s Canadian return has no bearing on this. However, as you pointed out, it really should be irrelevant as you shouldn’t end up owing any tax to the US.
Finally, yes, according to the Social Security Administration “If you are self-employed and residing in the United States or Canada, you generally will be covered and taxed only by the country where you reside.” Be careful, if you are using a packaged software program then it may want to add the self-employment tax. You will have to go to Schedule SE, subtract the income back out again and include an explanation on a supplemental schedule.
Hi, my last post has disappeared, any idea why?
One other question about form 2555:
how would I report payments form long-term disability (wage loss replacement) paid from an insurance plan that both I and my employer contribute to? The disability was due to a work related injury.
Thanks again
George, sorry I’m getting back to you late but it has been a holiday weekend. You should see your question and the corresponding answer now.
Usually disability goes on line 7 of the 1040, although I would have to know more to be sure. Then, it could be included on line 19 of the 2555.
Tyler, thank you for this guide and especially for the Q&A. I have found it helpful.
I am trying to determine how to accurately report date of Tax Home and Bona Fide Residence. My client is a Canadian citizen, born in Canada, who received a US Birth Abroad certificate making her also a US citizen after birth. She resided in Canada growing up, went to University in the US, and then return to Canada once finished university. While attending university her parents/family were residents of Canada, and she returned to her parents home for the summers.
My questions are:
1)Do I report her Tax Home and Bonafide Residence as her birth date, or the date she returned to Canada after finisher her University?
2)does She list United States AND Canada where it asks for citizenship, or just United States?
3)She also attended University in Canada upon returning and received Scholarship from her university and her province. Does she report this on Form 2555?
4) For one year she received wage loss replacement (long term disability) through the insurance company she and her employer contribute to for LTD/STD. Can she report this on Form 2555? Or does it have to be Form 1116 passive income?
5) One year she received employment insurance benefits. Can she report this on Form 2555 of does she use Form 1116 passive income?
6) For some years she has multiple employers. Does she complete a separate Form 2555 for each employer? And what if she had self-employment business income too? Is this a separate Form 2555 or does this get reported on the same Form as one of her employers?
7) The W-2 asked you to check-mark if you have a pension plan with the employer. Does she have to report contributions her employer has made? Even if she didn’t recevieve any distributions?
Thank you so much! Very much appreciated
George, that’s quite a list of questions! I’ll do my best
1. I believe that the answer to this will depend upon whether she ever established residency in United States while here. Was she just studying here or also working? Did she go home over the summers or stay in the US? If she was just here as a student then I would go with date of birth. If she was a resident here then date of residency.
2. Just the United States, which is what the form wants. Her Canadian citizenship is irrelevant for US tax law.
3. The rules would follow the same rules as a scholarship here. If the scholarship was for a degree-seeking program (even if she never earned the degree) and the money was spent on tuition, fees, or educational materials then it would not be included in income nor would it be included on Form 2555.
4. And 5., I am no expert on how that works in Canada but, assuming it would correspond with unemployment and disability in the US, I would say yes. The items would be included in income and then also added to line 23 of Form 2555. You should probably elaborate what they are and how you made the currency conversion on a schedule.
6. Yeah, that is one of the bizarre things about the Form 2555, there is only room for one employer but, as I understand it, only allowed one Form 2555 per taxpayer (i.e. two if married). I would just put the principal or most recent employer on line three and then have a supporting schedule for line 19 with a line for each employer that gives the name and also the currency conversion.
7. Alas, you are only able to exclude contributions to retirement plan contributions to US certified plans, which hers is most likely not. So the contribution is, most likely, income to her at the time of contribution and would be reported as such and then included (perhaps line 23) on Form 2555.
8. The bright side of including the contribution in income is that it is a non-taxable event when distributed. So, if I am reading your question correctly and it relates to 7 above, the payout would not be included in income and, thus, would also be excluded from Form 2555 and Form 1116. This is assuming that it was treated correctly at the time of contribution.
I hope that this helps, George. It gets complicated when you are dealing with international items because some of the income may or may not have US equivalents. The general idea is to try to report the income on the line of the 1040 that you would report the corresponding US income and then, most non-passive income can be included on the Form 2555.
Hi Tyler,
Just stumbled across your site. A Jewel!
We’re US citizens permanently residing in Australia with 3 kids (all naturalized while in the US, prior to relocating). My last tax filing was for 2007 (the year we left) and we have not reported since. Your document and the QA that follows encourages me to do so, especially since both earned income and local tax offsets should mean zero owing to the IRS.
That said, I must confess that I didn’t think about my kids liability to the IRS. The older ones are students, still under 24, so they can still be reported as dependents (if no income), I suppose but their future is looking bright
So you certainly got me thinking! I guess that if they are a long way from the 2555 exclusion, they can only look forward to the paperwork!
Thanks and I’ll keep watching this thread for advice
PS – as Australian residents we’re covered by a dual social security treaty. That’s a whole other area worth considering since social security doesn’t yet know about our local social security payments despite knowing about our residency. I wonder if it will gather that and retain our social security rights, once we file the missing 2008 – 2010 taxes?
Tamir, as you note the life of the expatriate American isn’t just bridge parties, mojitos, and swapping war stories with the XX “Most Interesting Guy in the World!” Soon your kids will know that joy that is filing 2 different tax returns.
As far as social security, Australia and the US have a totalization agreement that would exempt you from paying social security to the US, so that isn’t really a concern. Of course, you won’t get any credit for your wages either but you will still have access to any benefit you may have accrued in the US. I think that the Australian system is a much better bet for higher income taxpayers then the one that we have in place here.
Dear Tyler,
Thank you for putting together such a useful website. After filling out the 2555 and the 1040, should we also include a copy of our foreign tax document that states the amount of money that we earned during the tax year? I live and pay taxes in Germany so obviously the form is in German, which wouldn’t do the IRS any good. Yet, I still feel I should submit some type of proof or at least circle my yearly income for them on the German tax document. Is this necessary?
Thanks for your help!
Jim, great question and one that actually comes up quite often with clients. Only submit the necessary documentation to the IRS. Usually, this means any documents like W-2s or some 1099s that show that tax was withheld from you. Other support for your income tax return needs to be filed away until the statute of limitations runs out and then destroyed. The general rule is to keep supporting documents for three years from the date of filing or for six years if you are self-employed. Of course, there may be other reasons to retain documents such as statements from your broker.
clarification: if you established residence in a prior year do you use that date for tax home established?
hi Tyler,
One quick question. Is the date for tax home established based on the calendar year you’re filing for (starting January 1st) or when you first established residence in that country?
I couldn’t find any information that clarifies which date they require.
Thanks,
Brett
Great question Brett; the clock starts ticking the very day that you have began your residence in the country. To use the Bona Fide Resident test then you must have established residency as of January 1rst of the current tax year. This is why you would usually use the Physical Presence test in your first year, and the exclusion would therefore be pro-rated for your time in the country assuming that you fulfilled the requirement of have been present for the entire year before the date that you file (including extensions).
Looking at your comment above my impression is that you were a resident of Country B, moved back to the States for a while, and then back to Country B again, correct? Assuming I am understanding you correctly then your first stay in the country would be irrelevant, the relevant date would be the date that you established residency during this stay. I hope that this answer was of service to you.
if someone goes abroad to do a 90-day project and earns $15,000, how would he file Form 2555? He is not a bonafide resident nor he meets the physical presence test. BTW, this is the only income he has for the year. Can he just file 1040 and not worry about 2555? Thanks.
Abdul, in your situation it does not seem as if you would be eligible for the exclusion of income that comes with filing the Form 2555. You would file the 1040 without the Form 2555 but could still file Form 1116 to get the credit for any taxes that you paid to the foreign government.
Hi, Tyler
My situation is exactly the same as Rhonda’s client (above) – except that I have 2 children. Both adults, both born in Canada and both applied for US citizenship approximately 20 years ago. All of us have only lived in Canada, and only earned income in Canada. I have not filed US tax returns since living in Canada, under the (mis)belief that it was not necessary as long as I did not earn any income in the US. My children have also never filed.
Question 1: How far back do we need to go? I note Rhonda’s comment about filing for 2005-2010. I do have approximately 3 recent years of earnings over 91,500, but all other years were under that. Do I really need to go back 30 years?
Question 2: Elsewhere I heard that if the US tax return is filed late a 2555 cannot be used. The comment was that the election is only eligible for returns filed on time. Do you have any knowledge about this?
Question 3: I actually just today heard about the requirement to file. I have no idea how to go about getting all of the information and actually submitting returns by end of August. Do you have any advice on how to expedite this, or is there any chance for lienency? What happens if to returns NOT filed by end of August?
Question 4: What is unearned income, and how is it determined?
My apologies for so many questions, but I hope the answers will be helpful to others as well as myself.
Thank you so much!
Ruth
This is a very common situation; people assume that, because they don’t have any US income, they don’t need to file a US return. As far as how far back you need to go, that is really more of a legal question than a tax compliance question, but I’ll give you the broad options. The technical response is that you would have to file back as far as you met the filing requirement, about $4,000 in earned income as an employee or $400 self-employed (yes, there are many other factors but that gives you an idea). A practical answer is to go back six years. The IRS can go back as far as they want if you have not filed as the statute of limitations starts the day that you file; however, they are unlikely to go back further than six years. Some taxpayers prefer to roll the dice and start filing in the current year without going back and risk having the IRS ask them about the prior years.
As to question 2, I have filed many returns late using a Form 2555 (not my own!) and have never had a problem. I tried to look that up but didn’t find anything suggesting that you couldn’t do so.
Moving on to question 3, unless you have already filed the extension you are already late, the August deadline is only for those who filed an extension. Now, I wouldn’t panic at this point but would try to get everything done as soon as reasonably possible and then determine what your tax liability is. Judging from what you said above I would guess that you will not owe anything for most, if not all, years.
Finally, unearned income is the opposite of earned income, which is income that you have earned from your work. As a general rule, income from dividends, interest, rents, and royalties are all considered unearned income.
I appreciate your questions, Ruth, as sadly you will find that many others share your predicament and will benefit from your inquiries.
Hi Tyler,
Thanks for the information. This is great news!
All the best,
Brett
Hi Tyler,
Thanks for creating this website. The information here is great.
I have a question. I a resident of Japan and pass the physical presence and bona fide residence test so can file for the earned income exclusion. My taxes were paid in Japan on total income.
My earnings are $26,000 higher than the exclusion. Am I allowed to file form 1116 on my earned income along with form 2555 to cover the additional tax I paid here? Also, if my employer pays no housing expenses on my behalf, do I qualify for the housing exclusion?
Unfortunately, I didn’t realize I had to file these forms until a week ago when I found out about the FBAR filing deadline for August 31st so it’s a late filing and I’m trying to get this all done quickly.
Thanks for your help,
Brett
Brett,
I’m glad that you found the information useful. I’m here to serve! As to your first question, yes, you absolutely can file the Form 1116 for the amount of income over the exclusion. The amount is reduced by the income reduced by the income that was excluded by the Form 2555, see my reply to James below for the formula.
As to your second question, absolutely yes, you can qualify for the housing exclusion irregardless of what your employer pays for. The way it works is that anything the employer pays for gets included in your income and then backed out with the exclusion. Keep in mind that the exclusion is for an amount about the base for the US.
Correction to the above:
I’m living abroad and have not paid taxes since 2002
Hi Tyler, thankyou for your help.
I’m living abroad and have not filed taxes since 2001.
The last time I paid was in 2002 when I was living and working in the states. I moved overseas November 2002.
How do I start? Where do I start?
ps.. in 2003 and 2004 I was living with my parents abroad who are non-US citizens, and I was unemployed. I haven’t visited the US since I left in 2002.
Frank,
There are many factors going on here that could affect how you go about this. The requirements for filing while overseas are the same as if you were in the States, so if your gross income was above $9,350 in 2010 you most likely needed to file a return. You can see the IRS guide for who needs to file here. So you would need to file for any year after that. I will tell you that some people start filing in the current year and hope that the IRS doesn’t ask about earlier years, but they would certainly have that option. If the IRS asked questions then they would start to file successive previous years until they were clear. As noted in the article, where you lived during this time is not relevant to your filing requirement.
Thanks so much for the cliff notes on Form 2555. Very helpful indeed! I do have a question regarding the foreign earned income that should be reported on Line 7 of the 1040. Should this be whatever is reported on Line 26 of the 2555 or what is reported on line 22g which is what my tax preparer used? Thanks in advance.
Dee,
I’m blushing from your praise! Line 26 of Form 2555 is the total for your foreign earned income and is included with any domestic amounts on line 7 of your 1040. Line 22g is just a total of the amounts that your employer paid on your behalf for living expenses. This would be included in line 26 but is normally only a part of it.
Tyler,
Thank you for your response. I am sure the mother and children hold dual U.S. and Canadian Citizenship. The husband/father is and has always been a Canadian Citizen. The 3 children are adults, all married to Canadian citizens. At this point I have their Canadian tax returns for 2005-2010. I am in the process of getting them translated (all in french!!). I know that they each have wages, self-employment income and unearned income in the form of interest, dividends and capital gains. ALL this income is earned in Canada, all the tax has been paid to Canada. My question is, I report all the earned income on form 2555 and where do I report the UNearned income? Form 1116?
Thank you for your assistance.
Best Regards,
Rhonda Pucci
Rhonda, the unearned income goes on schedule B and then will flow to Form 1116 (assuming they paid tax on it). You will need two Form 1116s, one for the earned income and one for the unearned income. The earned income goes on line 7 of the 1040 and then the exclusion from Form 2555 is a negative number on line 21.
I feel for the taxpayers, it really is a nightmare and quite silly. However, I feel even more for you! It really gets to be a pain especially when you are translating languages and currencies and even converting from a fiscal to a calendar year. Best of luck!
Tyler
Hi Tyler,
I think your website is great. In the past my husband’s work has taken care of our taxes (we have been abroad for 10 years) however he changed company and now we have someone else assisting us but is not as familiar with expat us taxes. The income is 125000 and housing 48,000 our allowance is for the country we live in is 57,000 (which is rather paltry compared to the costs). Our biggest concern is we have two children in schools which is about $28,000 for each child (this is the going rate for schooling and we don’t have an option for local schooling as we are not citizens of their country. ) Can this income be off set in any way as the only reason we are given this compensation is b/c we reside here. It should be noted that China does not tax education expenses and therefore we do not have taxes to balance it out. Our taxes paid to China are around $30,000. I am very concerned about this and any assistance would be greatly appreciated.
If the education expenses were paid to you by your employer as reimbursement for your children’s education (or paid directly by your employer) then they would go on line 22c of Form 2555 and would be included in the calculation for the housing exclusion. Alas, the bad news for you is that if you are already at the limit for the housing exclusion then you will get the expense (it will be included in your earned income on line 7 of the 1040) without the corresponding benefit. I hate bearing bad news! Thanks for the kind words and the opportunity to serve.
Tyler,
My client is a Canadian resident, with dual U.S. citizenship(she was born in the U.S.) She has resided in Canada since marrying a Canadian resident/citizen at least 30 yrs ago. They have 3 children, also with dual Canadian/U.S. citizenship. All their income is Canadian earned. They ALL reside in Canada 100% of the time. As dual citizens, we understand they must file U.S. returns. The 3 children are required to file too, is that correct? They all file/pay Canadian taxes. We plan to file U.S. returns for the 2005-2010. I assume I will report their income on form 2555, use the exclusions and file 1116 for any unearned income/tax paid.
Any advice is greatly appreciated.
Rhonda
Rhonda,
You’ve got multiple issues going on here, some of which I may not be qualified to help with. First, you are absolutely right about the client who was born in the US. She is subject to all US reporting requirements just as any other citizen and your strategy is the correct one. What I do not understand is if the spouse is a US citizen as well. If he is, then they could file together (married filing joint) and his income would go on the return along with hers. If he is not then she has the option of filing married filing separate and excluding his income.
I am not an immigration lawyer but it is my belief, based upon my experience, that the children of of a US citizen and a foreign national are NOT automatically US citizens if they were born overseas. In fact I think that they must actually apply to be citizens. Obviously, if you are sure that they are citizens then it is a moot point and they would file in the same way. I am under the impression that they are adult children so correct me if I’m wrong.
Dear Tyler, the work you do on this website is wonderful! Form 2555 is extremely difficult to fill out if you are not accustomed to filing them out and your insight is very helpful.
I have a client who recently starting working as of June 2011 in Switzerland. He gets paid monthly and he is wanting to prepare himself for the upcoming tax season as far as getting an estimate on how much taxes he might owe the US. He would try for the Foreign Tax Credit but the US Tax rate is higher than the tax rate he is paying Switzerland so that leaves us to file the FEIE instead. I’m going to suggest that he file an extension next year so that he can get the full exclusion of $92,900. Per his paystubs he makes $20,000 CHF per month plus gets a parking allowance of $250/month. I’m using an exchange rate of $.84CHF = $1USD. So he makes generally $24,107USD per month total and by Dec 2011 he will have made $168,750 and then if we extend him thru May 2012 his total income would then be $289,286 USD. With the FEIE he would he will have an income of $196,386. Is there anything that can help reduce his taxable income down further? He also contributes to a Swiss Pension at $1000CHF/month…
Any advise would be helpful. You can also email me if you’d prefer.
Thanks in advance.
Actually, Diana, how it works for someone who becomes eligible under the physical presence test is that they get a pro-rated amount of the exclusion for the portion of the year abroad. For example, in your situation if your taxpayer arrives in June 15th, 2011 and continues to stay abroad until June 15th, 2012 (they get an additional two months to file for living abroad) then he will qualify under the physical presence test. You will have filed the extension, including with it all estimated taxes due. Then on June 15th he will be eligible for a pro-rated exclusion equal to about half the full 92,900 (the exclusion for 2012) or 46,450. This would only apply to his income earned in Switzerland during 2011, which you estimate to be about USD $144,600. Keep in mind that he can get an additional exclusion for housing of between $90 and $232 per day, depending upon where he lives in Switzerland (and on how much he spends). Now, what is left over will be included in the AGI and then on to his taxable income. Then, finally, he will most likely be eligible for the credit on his Swiss taxes paid. This amount is adjusted so that he only gets credit for the amount on income not excluded on the Form 2555, but will still be beneficial to him.
The deductions available to an employee abroad really are pretty similar to a domestic employee and include participation in tax-deferred retirement plans and a tax-advantaged health savings plan. Also he may have moving expenses as part of his new employment.
As I mentioned, the exclusion for housing is unique to expatriate employees and you will want to be aware of what living expenses he has that qualify. In addition, he may not be liable for social security contributions from his wages abroad, depending on whether his employer is a US or foreign company. Good luck, please let me know if you have more questions or how it goes.
Thank you for your response. You helped me tremendously and also answered another question I had regarding if you can claim the Foreign Earned Income Exclusion and the Foreign Tax Credit at the same time. From what I understand, a person can claim both but can only claim the FTC on any portion of Foreign Earned Income that was not excluded using the FEIE…. correct?
I have told clients recently that you can either take one or the other but need to make the correction, if this is untrue.
Thanks
Diana,
Exactly right, the amount of the Form 1116 is prorated by the amount of income excluded on the 2555. So you usually would do the Form 2555 and then Form 1116 and the reduction goes on line 12 with an accompany statement of how it was calculated. The calculation is the amount of income excluded on Form 2555 divided by the total foreign earned income * the tax paid to the foreign government on that earned income.
Tyler,
I’m glad I found this site. I’ll be leaving on Sept 1st to a designated combat zone as a civilian contractor. Since the first four months won’t qualify under the physical presence test am I stuck paying taxes on those first few months? Or should I file an extension come next year. Either way, I believe I’m going to hire a firm that specializes in expat taxes. Could you recommend one or at least tell me what to look out for when searching for a firm?
Thanks
Jerry, as you probably know civilian contractors don’t get the same tax considerations as servicemen. However, as you mentioned, you may still be able to exclude a pro-rated amount under the physical presence test if you file the extension to October 15th and if you fulfill the physical presence requirements by then. Remember, you will have to file the extension and send in an estimate of the tax due by June 15th. It gets rather tricky and I agree that an expert is probably advisable. Most national level accounting firms can help you prepare your expatriate tax return. The local firm that I primarily work with does not offer that service but I work with Greenback Tax in preparing international returns and feel very comfortable recommending them. Tell them Tyler sent you.
Dear Taylor,
My mom is a retired swiss-american dual citizen living in Switzerland since 1982. She simply wasn’t aware of her obligation to file an IRS return. In fact, I just found out yesterday, by chance. Does her Swiss pension qualify for form 2555 or only form 1116? Is she going to end up paying hefty fines on her Swiss bank accounts when she files? As of today, the IRS has not caught up with her, but I think FATCA might blow her out of the water, so I want to make sure she gets into the good graces with the IRS before they do.
Worried,
Anita
It gets rather silly, doesn’t it? The pension does not qualify for the Form 2555, but generally pension income, and especially if it is social security, is only taxable to the country of residence. This depends on the tax treaty between the U.S. and the individual country. The Swiss treaty can be accessed here. How far you might go back is a matter of judgement and you may wish to seek counsel on that.
The issue of the foreign accounts is separate. Please read the article I wrote on the TD F90-22.1 which should give you a starting point on filing requirements for overseas accounts. The opportunity of an amnesty exists, but, again, your mother’s situation might require consulting an attorney.
Hi Tyler, sorry for not giving you all the information. I filed a 2555 for income exclusion only and with it my taxable income, line 43 is $35,697.00. Now I followed the tax table and came up with $5,100.00 in taxes owe and paid it. Jun 2011 IRS notice said if I claimed the foreign earned income exclusion, I must figure my tax using the foreign Earned Income Tax Worksheet found in the 1040 instruction book and said it appeared that my taxes were not computed using this worksheet or was computed incorrectly. IRS use the same figures and came up with my tax owed at $10,000.00. Now I went back and filled out this form in the 1040 book page 36 and I still come up with $5,100.00 as tax owe for the year; unless I’m doing something wrong in the procedures. I’m not filing any Qualified Dividends and Capital Gain Tax or a Schedule D; so I should be using the Tax Table to figure out my tax. So what do you think about this situation? Any help in understanding this process is appreciated – THANKS.
Well James, I wish I had better news but I don’t. The problem is that you have to include the exclusion in getting to the appropriate rate. For instance, lets say that you were able to exclude the maximum $91,500 from the Form 2555. What you have to do now is add the $91,500 plus the $35,697 that you were unable to exclude to get to your marginal rate, 25%. Then you have to multiply the $35,697 by the marginal rate to get to your tax with the exclusion. Since $36K * 25% = $9K that tells me the IRS number is about right. This is assuming all of the $35,697 is earned income, of course.
What the instructions have you do is calculate the tax on all income without the exclusion (using the regular table of page 74 of your instructions) and then have you look up the amount of tax attributable to the exclusion (say, find the $91,500 on the regular tax table) and subtract that from your first number to get to your actual tax. Not what you wanted to hear but at least you know now how to calculate your liability and can save yourself some interest and penalties.
Man, I just got a letter from the IRS saying that even with my form 2555 I owe more money because I didn’t calculate my taxes with the Calulation Foreign Earned Income Tax Worksheet. Now none of the figure change for Gross / Taxable Income but the IRS calculation using the worksheet double the amount of my tax I have to pay. Don’t Get It.
Any advice of how to keep this from becoming a pain every year I work overseas. I use the tax exemption during the year; so I pay no tax on the money thru out the year. I’m over the exempted amount due to being retired military, so the lump some I have to pay out is really from that money being taxed. I guess the silver lining is that I can afford to pay my taxes.
Thanks
Sorry James, I have no idea what that is referring to. Foreign income is taxed exactly the same as domestic and the same rates apply. Perhaps they have included self-employment tax, which you would see on line 56? They usually give you a line for line breakdown of what has changed. Take a look and let me know if you see anything else.
My question is will I still show the amount on line 21 of the 1040 form as my total income and pay taxes on that amount when I have qualified for the foreign earned income credit from form 2555? I came to this foreign country on June 16, 2010. As of
June 16,2011 I have met the Bona Fide Residence Test. Please let me know if this is true. Thank you
Sharon, first, the Bona Fide Residence Test requires that you have been a Bona Fide residence for the entire tax year in question, so calendar year 2010. It does not sound like you meet that test but instead may meet the Physical Presence Test but will have to pro-rate for the period outside the country. Your earned income will go on whatever line it would normally go one, irregardless of whether you qualify for the exclusion. So, Line 7 for wages, line 12 for Schedule C, etc. Then the exclusion from the Form 2555 will flow through to your return on Line 21 as a negative number, effectively reducing the number above. I hope that answers your question and, if not, please write back with more information.
Thanks,
Tyler
Tyler, thank you for the snappy reply. This is great to have this site to bounce questions off of. Thank you for the time and energy you put into this, keeping us “cheap folks” informed and keeping us on the tax worlds “straight and narrow”.
Hi there–just found your site–we have worked overseas for 10 of the past 11 years. We took a year off from 2009 to 2010. We most recently worked overseas from Aug 1 2010 through June 10 2011, and return to the same job in August 2011. We have applied for and received an extension to the June 15 deadline for filing. I am having trouble using the Form 2555 when e-filing. The only place I can find on the 1040 to attach it is line 53, but the IRS keeps bouncing it back as rejected. I also am not sure we qualify for it since our uninterrupted overseas tax period (we earned nothing the rest of the year aside from cashing in a small portion of our mutual funds) is only 153 days. My questions are: Do we qualify to use the 2555? And how do I get the 1040 to reflect my foreign-income exclusion?
I hope you can help!
First, Form 2555 should flow through as a negative number on line 21 (Other Income) of your 1040. There should be no problem e-filing but sometimes a diagnostic can prevent it. I would check and clear any diagnostics.
Second, remember that the you must meet either the bona fide resident test or the physical presence test. Usually, for your first year this means the physical presence test as the bona fide resident requirement is for an entire calendar year. Also, you can file the extension to help you meet the physical presence test, giving you an extra six months (from April to October) to meet the requirement (330 days out of the U.S.A.). In addition, if you were forced to leave your country of residency due to a war or some other disaster you may qualify for a waiver.
I hope this helps, please send me an email if you need more specific instruction.
We live and work off of 501(c)3 donations, say on average of $30,000/year. That is the amount that I list on line #7, form 1040, my nonemployee compensation as shown in my 1099-MISC end of tax year form we receive from the tax exempt foundation. There are no taxes deducted on my 1099-MISC form and I don’t pay any self employment taxes. Our total yearly income ($30,000/year) is all listed as nonemployee compensation. We qualify as a bona fide resident and so file using the Form 2555. Am I missing something here, should we be paying a self employment tax? I’ve been filing this way, paying no taxes for the past seven years or so ever since we quit our jobs in the states, sold our home and moved here.
Thank you!
If it is a U.S. organization (which it is as a 501(c)(3)) then you owe self-employment tax, unless you qualify for the local version of Social Security from your host government and they have a tax treaty with the U.S. If you work for an organization without a U.S. physical presence then no social security is owed.
If you were employed and self-employed during the same tax year (in the same foreign country), how do you fill in form 2555? I’ve found conflicting suggestions elsewhere – some say to fill in one form for each, some say only fill in one form, but attach a statement with the details of the other employer. Is it just a matter of choice, or is there a right way?
I’ve never heard of anyone doing it any other way other than filing a form for each employer. I looked at the instructions to see if there was any specific guidance but did not find any. I would file the two forms (or as many as are applicable).
Thanks for the quick reply! Yeah, I’m used to forms telling you when they want multiple copies filled in, so it was a bit worrying :p
but where is the 2555 form? There are some problems with the IRS web site and I was counting on you to get the 2555.
Do I need to file 1040 together with 2555?
I have an entire exclusion , how could I pay social security and health aid ?
how could I calculate it ?
thank you
cordial greetings
Here is the Form 2555 and here are the IRS instructions to fill it out. The 2555 is always filed with the 1040 and your foreign source income will go on the appropriate line of the 1040 while the exclusion will go on line 21 as a negative number. If you owe social security then it should be withheld from your paycheck or you pay it in the form of self-employment tax that is calculated on Schedule SE. I would love to help more but would need more details as to your situation so please let me know if I have left any of your questions unanswered.
Thanks,
Tyler
Hi
What goes on line 38 on the form 2555?
Hi, stumbled upon your website doing research for my taxes. I need to fill out Form 2555 for the foreign income exclusion, but it asks for my employer’s US address. What do I do if my employer here in Korea doesn’t have a US address?
Thanks for the help!
Elmer, a U.S. address absolutely isn’t necessary (assuming that it is an overseas company). Just put the foreign address in line 4b and leave 4a blank.
Hi, I have hard time to fill Form 2555.
In Form 2555, what is Line 18 (e) no. of days in U.S. on business ?
I listed one trip to Japan during my 12-months period. Does (e) mean No. of days I had business relating to U.S. or in U.S. (returning to U.S. temporarily?) ? If I did not leave Japan during the trip, (e) should be 0?
I appreciate your advice.
Thank you in advance.
If you were not ever present in the United States during the applicable 12 month period then you need to put ““Physically present in a foreign country or countries for the entire
12-month period.”
I meant that he would report the income but would not take a foreign income exclusion for it. When he reports the income, does he have to also file the 2555 or can he just report the income and not take the exclusion.
Naomi, there is not obligation to exclude the income on the Form 2555. The only obligation is to actually report the income and so, if he wanted to pick it up but not file the Form 2555 then that is no problem.
Is one required to file the 2555 if he has foreign earned income, or if it is more beneficial to him not to file it, can he leave it off?
Naomi, if you are a U.S. citizen then you are required by law to report your income no matter where in the world it is earned. It is up to you whether you choose to illegally ignore the law or to comply with it and, through smart tax planning, still not have to pay any U.S. tax.
can you e file with form 2555?
Sure Chuck, the Form 2555 doesn’t prevent you from e-filing. However, you may have attachments that would preclude e-filing.