Are you among the many Americans working abroad for a living? One of the most hassling tasks for all U.S. Individuals working abroad in another country is to comply with the various tax obligations. Leave your Tax hassles in the hands of the Professional Tax Outsourcing Service Providers like Initor Global.
We are here to help you lucidly understand the tax requirements for individuals migrating from the United States for work opportunities. These tax requirements fall under the purview of Expat Taxation. As discussed in previous blogs, this branch of taxation is a bit complex. This is due to the presence of separate regulations in the country of origin and the current resident country.
Tax Regulations Applicable to U.S. Citizens and Resident Aliens abroad
The basic requirements for any U.S. Citizen or a person who is a resident alien living abroad are as follows:
For Tax Purposes, a Person is a resident alien of the United States if he falls under the Green Card Test or the Substantial Presence Test in a Calendar Year.
Understanding what constitutes Foreign or Worldwide Income
IRS applies tax liability on Foreign Income or Worldwide Income which consists of:
Methods to reduce Overall Tax Liability of U.S. Citizens or Resident Aliens Working Abroad
The best ways to lower an assessee’s Foreign Tax Liability are as follows:
Let us now explore each of the above methods elaborately.
This option is available to those U.S. Citizens and Resident Aliens living and working abroad who meet the stated criteria. For the year 2019, the Maximum amount of Foreign Earned Income Exclusion is $105,900. This limit is subject to annual indexation to adjust for Inflation.
Along with the Foreign Earned Income Exclusion, one can claim another deduction or exclusion. It is available from the Gross Income for the Person’s Foreign Housing Amount. The Foreign Housing amount must be more than a specific base amount. This exclusion is applicable for amounts paid for with Employer-provided amounts, which are taxable foreign earned incomes. In the case of Self-Employed Persons, it is relevant for amounts expended with Self-Employment Income.
Eligibility Conditions for Foreign Earned Income Exclusion and Foreign Housing Exclusion
A Taxpayer is eligible for the above two Exclusions if, he complies with the following requirements:
Bonafide Residence Test
To qualify for this test, the individual should reside in a foreign country for an uninterrupted period. The period includes the duration of an entire tax year. This continuous period can exclude brief temporary visits to the U.S. or any other country. For being eligible under the Bonafide Residence Test, the Person should also be a U.S. Citizen or U.S. Resident Alien or any National of a country having a treaty with the U.S.
Physical Presence Test
To qualify for this test, the individual must have a physical presence abroad in one or more foreign countries. The presence should be for a period of a minimum of 330 full days during any given 12-months, including the part of the year at issue. A Person is allowed to count his days abroad as per this test if he has his tax home in a foreign country.
Use of Form 2555 with Form 1040 to claim Foreign Earned Income Exclusion Benefit
What happens if you revoke Foreign Earned Income Exclusion for a given year?
A person may not claim the Foreign Earned Income Exclusion and revokes it in any tax year. In such cases, he cannot claim the exclusion for the next 5 years. To claim the exclusion, he needs to request permission from the IRS through a Private Letter Ruling, which will cost $2000.
This Credit avoids the onus of Double Taxation on U.S. Taxpayers. A person can avail of Credit for Tax paid in any Foreign Country when the Foreign Income is subject to Tax in both the U.S. and the respective Foreign Country.
A Person cannot claim this Foreign Tax Credit for the Income excluded under Foreign Earned Income Exclusion.
Use of Form 1116 with Form 1040 to claim Foreign Tax Credit
Claim the Foreign Tax Credit through Form 1116, filed with Form 1040.
Conditions for Claiming Foreign Tax Credit
A Person qualifies to claim the Foreign Tax Credit if he meets the following four tests:
No Dual Benefit of the Foreign Income Exclusion and Tax Credit from IRS
A Person can claim only one of the two options of Foreign Earned Income Exclusion or Foreign Tax Credit. He cannot claim both.
A Person can also claim tax benefit as per the provisions of the tax treaty signed between the United States and his Resident Foreign Country.
Other Obligations for U.S. Citizens or Resident Aliens in special situations
Foreign Bank Account Reporting Requirement with FBAR FinCEN Form 114
Types of Accounts that need to be Reported
Accounts that may not be Reported
Filing of Statement of Specified Foreign Financial Asset with Form 8938
Applicable Threshold Limits for the Value of Financial Assets
Unmarried/MFS- If the Total value of assets was more than $50,000 on the last day of the tax year or more than $75,000 at any time during the year
MFJ- If the Total value of assets was more than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year
Unmarried/MFS- If the Total value of assets was more than $200,000 on the last day of the tax year or more than $300,000 at any time during the year
MFJ- If the Total value of assets was more than $400,000 on the last day of the tax year or more than $600,000 at any time during the tax year
How can Initor Global help you with Complex Foreign Income Taxation Compliance?
We at Initor Global have tax professionals who are very well versed with the Reporting of the Foreign Income of the U.S. Citizens living and working abroad on the U.S. Tax Return. We are proficient with the preparation of Forms 2555, Form 1116, FBAR Reporting, and Preparation of Form 8938. Collaborate with Initor Global for Superlative Tax Outsourcing Services at the most budget-friendly rates. Contact us today!