Chris Rusch is the author of The Expat Tax Bible 2010, published by International Living. For additional information click here.

Filing Requirements for Citizens

Page Updated for 2009 Returns Filed in 2010

All U.S. citizens and residents who earn more than $8,450 (single) or $16,900 (married filing joint) in a year must file a U.S. personal income tax return - no matter where you live. If you are a U.S. citizen living outside the U.S., failing to file a U.S. tax return can result in the loss of your Foreign Earned Income Exclusion, and thus be a very costly mistake for you. As U.S. citizens, we are taxed on our worldwide income. The only way to legally reduce your taxes, and benefit from being outside of the States, is to file before the IRS comes looking for you and take advantage of as many allowable exclusions and tax credits as possible.

Foreign Earned Income

Foreign earned income is wages or self employment income (independent contractor earnings) you receive for services you perform while living outside of the U.S. It does not include interest, dividends, or other investment income. If you qualify, you can exclude up to $91,400 for 2009 of foreign earned income.

To qualify for this exclusion, you must be outside of the United States for 330 out of any 365 day period. It does not matter if the 330 days is over two calendar years (example: between March 1, 2009 to March 31, 2010) and a special extension to file is available to give you time to meet this requirement.

You can also qualify under the bona fide residency test by permanently moving to another country and making it your "tax home." This is a more difficult test to use and prove, therefore, most use the 330 day test.

The foreign earned income exclusion for expatriates and contractors working outside of the U.S. is not available if you are paid directly the U.S. government.

NOTE: However, if you are audited and you have not filed your returns using the foreign earned income exclusion, you will lose this deduction and will pay tax on all of your income! In other words, if you fail to file, or you file and do not use the exclusion, you will lose the exclusion.

Bona Fide Residency Test

The bona fide residency test is one of the most misunderstood and misused sections of the tax code by those working and living abroad...especially by contractors in military zones.

Someone is a bona fide resident if they move somewhere and make it their home. You do this by filing and paying taxes in that country, moving there and planning to stay indefinitely, etc. Someone who simply works in a country and intends to return to the US is probably not a resident.

The problem with the bona fide resident test is that it turns on your intent. Many improperly use the residency test and, if audited, will loose the exclusion. This means they will pay US tax, interest, and penalties, on the excluded amount (ie. on $91,400).

Also, if a preparer files a few of these residency based returns, and the IRS finds a pattern of misuse, all of that preparer’s clients might be audited. For this reason, I do not take any risks with this often misunderstood rule.

For additional information from the IRS website, click here.

Foreign Housing

You may also qualify for the foreign housing exclusion, or the foreign housing deduction. As above, you must have foreign earned income, meet the 330 day test or have a tax home in a foreign country, and the housing expenses must be for the benefit of your employer.

Combat Zones

For those in high risk, combat, or war zones, additional "safe housing" may be excluded for family members. This is when you have one home is a high risk area and another in a safe zone for you and/or your family.

Special rules apply to those in "camps" located in foreign countries that may allow you to exclude the value of meals and lodging over and above the foreign earned income and foreign housing exclusions.

Nonresident / Part Year Resident

The U.S. taxes anyone and everyone that lives in the States. If you earned money in the U.S., including salary, dividends, interest, etc., while living here, you must file a tax return.

If you are not a citizen and you move out of the U.S., you must file a Part Year Resident return. This tells the U.S. you are leaving and taxes you on your U.S. source income. As noted above, a citizen would file a return based on their worldwide income.

If you fail to file a final return the IRS computers will assume you are still here. Therefore, the computer will file for you and send you a bill. These are called "substitutes for returns" and can be filed on your behalf for each and every year. In these returns, the IRS makes far reaching assumptions about your income and sends you a bill. If you don't get the bill, or don't respond, this can become a major problem. The IRS may attempt to get to your foreign wages, assets, and bank accounts. Some of my cases with this issue have taken over a year to resolve, with the client's assets frozen.

Foreign Tax Credits

If you paid taxes to a foreign country and are subject to U.S. tax on the same income, you can take either a credit or an itemized deduction for those taxes. It does not matter how long you have been outside the U.S. or whether you are an bona fide expatriate for the foreign tax credit.

Taken as a deduction, foreign income taxes reduce your U.S. taxable income. Taken as a credit, foreign income taxes reduce your U.S. tax liability. In most cases, it is to your advantage to take foreign income taxes as a tax credit.

Filing Returns

I can help you determine if you qualify for the Foreign Earned Income Exclusion and ensure you get the savings you deserve. I have assisted many clients by preparing current and delinquent returns with foreign earned income.

For additional information on Delinquent Tax Returns, click here.

For fees and additional information on personal returns, click here.

 Click here to send me an email or call my direct line at (619) 557-0587. I will personally answer your call and your questions.

I have handled cases from around the world by phone, fax, email and mail. With experience in Europe, Latin America, Asia, and camps in Iraq, Croatia, and Bosnia, I can significantly reduce your U.S. tax and keep you in the system.

 

- Online Resources -

 

You can submit all of your tax information to us through our secure web interface.

 

First, fill in the Tax Organizer with your income, expense, and other data. This form will help you get organized, and guide you through most tax situations. You can access your form as many times as you need, or create multiple forms to cover multiple tax years.

 

Next, you can fax your supporting documents to us at (619) 557-0597, or upload them through Document Upload. Using the online system will get your confidential information and documents to us in the most secure way possible.