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Question:

What if I can't pay the full amount due with my tax return?

 

Answer:

If you are unable to pay the full amount of tax due with the return, file the return without payment with Form 9465 asking for an installment payment plan. You can request up to 60 months to pay the amount due on your return. This avoids the 5% per month late filing fee if you do not file your return on time. You will be charged interest and a smaller late payment penalty, but if you are sincere in your efforts to pay the monthly installments the IRS will work with you. However, once you agree to a schedule, STICK TO IT and don't fall behind!

Question:
I am a citizen of a foreign country and worked in the U.S. Do I need to file a U.S. tax return? What form do I file?

 

Answer:
Income from U.S. sources is subject to tax by the U.S. unless exempt under a tax treaty provision. Therefore if you worked in the U.S. you probably need to file a U.S. tax return. What form you will use will be determined by your tax residency status. If you have a green card, or were substantially present in the U.S. you are considered a resident and file Form 1040. Non Residents file Form 1040NR. Those with Dual Status file Form 1040 with Form 1040NR as an attachment. The U.S. tax rules that apply to foreign persons receiving U.S. source income are extremely complex and should only be addressed by a qualified U.S. tax advisor with international tax experience.

Question:
I am an American offered a foreign assignment. What do I need to do for tax purposes?

Answer:
You should first meet with your company HR representative if you are an employee to learn what foreign assignment benefits are available to you, including any tax protection. You should ask if the company will provide someone to assist you with your foreign and U.S. tax responsibilities and, if not, see that they will agree to reimburse you for the added cost. Next arrange consultation with a qualified tax advisor who is familiar with employer tax protection/equalization policies.

Question:
Will I still have U.S. taxes withheld from my salary once I begin working abroad?

Answer:
If you expect to have a portion of your foreign source earned compensation excluded under Section 911 of the Internal Revenue Code you can provide your employer with a completed Form 673 authorizing them to stop federal income tax withholding on that portion of your income that is expected to be exempt. Also, if you will be subject to foreign income tax on income that is not excluded, you can provide your employer with a signed declaration that you expect to be entitled to claim a foreign tax credit and avoid federal income tax withholding as well. You will still be subject to withholding of Social Security and Medicare tax; however you can avoid double taxation in the foreign country if there is a tax Totalization agreement in place between the U.S. and that country.

Question:
When should I file the U.S. income tax return for the first year of my assignment?

Answer:
Although the normal filing deadline for U.S. returns is April 15, if you reside abroad on that day your return is automatically extended until June 15. If you expect to qualify for the Sec 911 earned income exclusion and you are otherwise entitled to a refund without the exclusion you can file the tax return and then amend the return later after you qualify for an additional refund. Otherwise you can file Form 2350 requesting a filing extension until 30 days after the date that you expect to qualify.

Question:
How do I qualify for the foreign earned income exclusion?

Answer:
U.S. citizens and tax residents may claim the Section 911 exclusion if they meet either of two tests, the Physical Presence Test or the Bonafide Residence Test. To qualify under Physical Presence you must be physically present outside the U.S. for at least 330 of any consecutive 365 day period. Your qualifying period is the consecutive 365 day period. So if you begin your foreign assignment on July 1, 2009 and between January 1 and June 30 of 2010 you are physically present in the U.S. more than 35 days, you are entitled to no exclusion for Year 2009. I have seen people who do not understand this blow the exclusion for their year of arrival or year of return by failing this test. The second test is the Bonafide Residence Test. In order to qualify you need to evidence that you are a true resident of one or more foreign countries for the entire calendar year. Of paramount importance is that you have not made any statements to the foreign immigration or tax authorities to indicate that you are not a resident for the purpose of avoiding paying foreign tax.

Question:
What is my maximum foreign earned income exclusion amount under Section 911?

Answer:
The maximum exclusion is $91,400 for Year 2009 and $91,500 for 2010. In 2005 when, after it was nearly repealed by Congress, it began to increase again.The exclusion is determined based on the amount of qualifying days during the year. For example, if you began your foreign assignment on July 1, 2009 and did not return to the States before June 30, 2010, the maximum amount of foreign earned income that you could exclude under the Physical Presence Test for Year 2009 would be $53,588 (214/365 X $91,400). Note that it is determined based on the number of qualifying days in the year, not the actual amount of days spent outside the U.S. A frequent error made by U.S. expatriates is to claim too little exclusion.

Question:
If I pay taxes to a foreign country do I still need to pay U.S. tax?

Answer:
The U.S. requires that all U.S. citizens and permanent residents file tax returns every year and report their worldwide income from all sources. Portions of your foreign source earned income that is excluded under Section 911 should be shown on Form 2555 that accompanies your Form 1040. Your foreign tax credit is claimed on Form 1116. Taxes paid to a foreign country on income that is exempt or excluded from tax in the U.S., or eliminated by foreign source deductions, is not available as a credit against your U.S. tax liability. Foreign taxes paid on foreign source earned income cannot be used as a credit against U.S. source income, nor can it be used to offset U.S. taxes on foreign source income from other “baskets” (i.e. passive income from investments). Foreign taxes paid on foreign investment income can be applied against U.S. income taxes assessed against the same income. Also, a foreign tax credit cannot be claimed against foreign source investment income that is not subject to foreign tax. The foreign tax credit rules are extremely complex, and usually requires the assistance of a tax advisor who is experienced with international tax.

 

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