Tax Obligations of US Individuals

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:

  • Reporting World Income: Irrespective of the country of residence of a person who is a U.S. citizen or Resident Alien, his worldwide Income is subject to the U.S. Income tax Laws.
  • He needs to report all his IncomeIncome and pay applicable taxes. The tax payment is subject to exemptions as per International Tax treaties and IRS Code.
  • Filing Form 1040: One needs to report his Foreign Income specifically on Line 7 of Form 1040.
  • Employment Taxes Applicability: The tax requirements for Migrated U.S. Citizens or Resident Aliens are also incidental to Employment Taxes.

Resident Alien:

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:

  • Any Income gained from any foreign country apart from the USA. Exceptions to the list of foreign countries are International Airspace or International Waters, Antarctica, and territories under the United States.
  • Exclusions from Foreign IncomeIncome are earnings of Members of Armed forces, Government Employees by U.S. Government Authorities. Exclude such Income even when earned outside the U.S.

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:

  1. Check whether the assessee is eligible for Foreign Earned Income Exclusion
  2. Check if the assessee can use provision for Foreign Housing Exclusion or Deduction
  3. Check if assessee can claim Foreign Tax Credit
  4. Check Tax treaties between the United States and the Foreign Country

Let us now explore each of the above methods elaborately.

  1. Provisions of Foreign Earned Income Exclusion

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.

  1. Provisions of Foreign Housing Exclusion

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:

  • He must have a Foreign tax home
  • He must have earned Foreign Income
  • He must make a Valid Election
  • He meets the Bonafide Residence Test or the Physical Presence Test

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

  • A Person can claim the Foreign Earned Income Exclusion on Form 2555, filed with Form 1040.
  • An individual must file his return even if he has Nil Tax Liability after claiming this exclusion.

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.

  1. Provisions of Foreign Tax Credit

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:

  • The Tax must be imposed on the Tax Payer in the Foreign Country
  • The Taxpayer should have accrued or paid the tax liability
  • It should be legal and Actual Foreign Tax Liability
  • The Tax imposed must fall under the purview of Income Tax or Tax levied in lieu of Income Tax

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.

  1. The benefit under Tax Treaties between the U.S. and the resident Foreign Country

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

  • A U.S. Taxpayer, who has any signature authority over, or interest in, any Foreign Account with a value exceeding $10,000 at any time during the tax year should file the FBAR FinCEN Form 114.
  • The Reporting must be directly made to the Financial Crimes Enforcement Network. This bureau is separate from the IRS and falls under the U.S. Department of the Treasury.
  • The Person must provide the maximum value of the Foreign Financial Account at any point in time in a tax year.

Types of Accounts that need to be Reported

  • Any Financial (deposit and custodial) accounts held at foreign financial institutions.
  • Any Financial account held at a foreign branch of a U.S. financial institution.
  • Any Foreign Accounts with Signature Authority
  • Any Foreign Stock Securities
  • Any Foreign mutual Funds
  • Any Foreign Life Insurance or annuity contract with a cash value

Accounts that may not be Reported

  • US Persons included in Consolidated FBAR
  • Foreign Accounts owned by Government Entity
  • Owners and beneficiaries of U.S. IRAs
  • Foreign Accounts maintained as per U.S. Military banking facility.

Filing of Statement of Specified Foreign Financial Asset with Form 8938

  1. This Form is to be attached to the tax return. It has the same due date as the tax return, including any notified extensions.
  2. The Form may include accounts that are also required to be reported on the FBAR

Applicable Threshold Limits for the Value of Financial Assets

  1. Thresholds: If you are living in the U.S.

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

  1. Thresholds: If you are living outside of the U.S.

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!

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