Sunday, March 23, 2008

U.S. Citizen or Resident with Foreign Income

Question: I am a U.S. citizen. If I leave the U.S. for good and start working abroad and pay the local taxes, do I still need to file my US tax return even if I don’t have US income? What happens if I don't?
Answer. A U.S. citizen or resident, you must file the U.S. tax return if you meet the filing requirements. You must report your world-wide income (even the income on which you paid the taxes in the foreign country). This applies to earned income (such as wages and tips and self employment income) and unearned income (such as interest, dividends, capital gains, pensions, rents, and royalties).

On your U.S. tax return, you will get your usual standard deduction and exemption deductions depending upon your filing status. Also, the U.S. has tax treaty with most of the countries, which means that on the income in other countries, you will get credit for the taxes paid in other countries.

Foreign Earned Income Exclusion Form 2555If you reside outside the United States, you may be able to exclude all or a part of your foreign source earned income by filing Form 2555-EZ/2555 (Foreign Earned Income). You can also get housing exclusion and/or deduction. The foreign earned income exclusion amount for 2009 is $91,400 (for 2007 is $85,700 and for 2008 is $87,600).

To be eligible to file Form 2555, you must meet Bona fide Resident Test or Physical Presence Test. Normally you meet the Bona fide Resident Test if you are a U.S. citizen who is a bona fide resident of a foreign country, or countries for an uninterrupted period that includes an entire tax year. You meet the Physical Presence Test if you are U.S. citizen or resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 months in a row. A full day means the 24-hour period that starts at midnight.

Foreign Tax Credit Form 1116
You can get credit for the taxes paid in the foreign country; you file Form 1116. Foreign Tax Credit (Individual, Estate, or Trust).

Social Security and Medicare Taxes
In general, U.S. social security and Medicare taxes do not apply to wages for services you perform as an employee outside of the United States unless one of the following exceptions applies.
*You perform the services on or in connection with an American vessel or aircraft and either: You entered into your employment contract within the United States, or
The vessel or aircraft touches at a U.S. port while you are employed on it.
*You are working in one of the countries with which the United States has entered into a binational social security agreement.
*You are working for an American employer.
*You are working for a foreign affiliate of an American employer under a voluntary agreement entered into between the American employer and the U.S. Treasury Department.

Your Self-Employed IncomeGenerally, on your income as Independent Contractor or self-employed person you must also pay SE taxes, however this may not apply for the countries where U.S. has totalization agreement. For this you file schedule SE (Form 1040). For more information on income as Independent Contractor or Self employed income, read

Binational Social Security (Totalization) AgreementsThe United States has entered into totalization agreements with several foreign countries including Australia, Greece, Republic of Austria, Ireland, Korea (South Korea), Belgium, Italy, Canada, Japan, Spain, Chile, Luxembourg, Sweden, Denmark, Netherlands, Switzerland, Finland, Norway, United Kingdom, France, Portugal, Germany. Generally, under these agreements, you will only be subject to social security taxes in the country where you are working. However, if you are temporarily sent to work in a foreign country and your pay would otherwise be subject to social security taxes in both the United States and that country, you generally can remain covered only by U.S. social security.

You Must File U.S. Tax Return
If you don't file your return, you must ultimately pay the taxes along with interest and penalty. If you don't return back, you may be declared expatriate. Also expatriation tax provisions apply to U.S. citizens who have renounced their citizenship and long-term residents who have ended their residency. If you are subject to the expatriation tax, you must file Form 1040NR for each year of the 10-year period following expatriation.

Your foreign income may be taxable in the state you are domiciled or were resident when you left the country. And on the state tax return, you do not get foreign tax credit or foreign earned income exclusion. If your foreign income is taxable in a state depends upon your situation. If your stay out of state is considered temporary or transitory, then many states in the U.S. will tax you. For this you must read the state’s residency requirements, and the definition of temporary or transitory stay.

Foreign Bank and Financial Accounts & Form FBAR
Every U.S. person who had any financial interest in, or signature authority or other authority over one or more financial accounts in a foreign country, may have to complete Treasury Department Form TD F 90-22.1 (also known as FBAR), Report of Foreign Bank and Financial Accounts, and file it with the Department of the Treasury. You must file this form if the combined assets in the account(s) are $10,000 or more at any time during the entire year. Disclosure of this information is mandatory. Read more at:

Specified foreign financial assets (SFFA) Form 8938
A specified U.S. person must file Form 8939 if foreign assets increase the threshold amount ($50,000). A specified person includes (1) a U.S. citizen, (2) a resident alien, (3) a nonresident alien who elects to be treated as a resident alien for purposes of filing a joint income tax return, and 4) a nonresident alien who’s a bona fide resident of American Samoa or Puerto Rico. Non filing penalties are as harsh as for Form TD F 90-22.1.

For more information, IRS Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad.
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More Articles on Tax for Aliens
1. U.S. Tax Filing Requirements for Non-Residents
2. Substantial Presence Test
3. Social Security and Medicare (FICA) Taxes for Non-resident Exempt Individual
4. U.S. Tax Treaties for Professors, Teachers and Researchers
5. U.S. Tax Treaties for Students and Apprentices
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1 comment:

Anonymous said...

The above comments says "Generally, on your income as Independent Contractor or self-employed person you must also pay SE taxes, however this may not apply for the countries where U.S. has totalization agreement."
I am self employed living in Australia but thought I still had to pay SE tax on my global income on my US return. Australia and USA does have a totalization agreement. Can I apply for excemption as a self employed person? I am having a difficult time if this is only available to large companies for their employees.