Estimated Tax

The requirements for determining who must pay estimated tax are the same for a U.S. citizen or resident abroad as for a taxpayer in the United States. For current instructions on making estimated tax payments, see Form 1040-ES.

If you had a tax liability for 2002, you may have to pay estimated tax for 2003. Generally, you must make estimated tax payments for 2003 if you expect to owe at least $1,000 in tax for 2003 after subtracting your withholding and credits and you expect your withholding and credits to be less than the smaller of:

1. 90% of the tax to be shown on your 2003 tax return, or
2. 100% of the tax shown on your 2002 tax return. (The return must cover all 12 months.)

If less than two-thirds of your gross income for 2002 or 2003 is from farming or fishing and your adjusted gross income for 2002 is more than $150,000 ($75,000 if you are married and file separately), substitute 110% for 100% in (2) above. See Publication 505 for more information.

The first installment of estimated tax is due on April 15, 2003.

When figuring your estimated gross income, subtract amounts you expect to exclude under the foreign earned income exclusion and the foreign housing exclusion. In addition, you can reduce your income by your estimated foreign housing deduction. However, if the actual amount of the exclusion or deduction is less than you estimate, you may have to pay a penalty for underpayment of estimated tax.

Information Returns and Reports

There are several instances in which you may have to file either an information return or a report. You may have to file a return or a report if any of the following apply.

• You are a shareholder of a controlled foreign corporation.
• You are a shareholder, officer, or director of a foreign personal holding company.
• You are a shareholder, officer, or director of a U.S. entity that acquires, disposes of, or is involved in the reorganization of a foreign corporation.
• You acquire or dispose of an interest in a foreign partnership, or your proportional interest otherwise changes.
• You are the responsible party for reporting foreign trust events.
• You receive large gifts or bequests from foreign persons.
• You are treated as owning any portion of a foreign trust under the grantor trust rules.
• You receive distributions from a foreign trust.
• You ship currency to or from the United States.
• You have an interest in a foreign bank or financial account.

Form 5471.   Form 5471 must generally be filed by certain U.S. shareholders of controlled foreign corporations and by certain shareholders, officers, and directors of foreign personal holding companies. Form 5471 must also be filed by officers, directors, and shareholders of U.S. entities that acquire, dispose of, or are involved in the reorganization of a foreign corporation.

If Form 5471 is required, you must file it at the time you file your income tax return. More information about the filing of Form 5471 can be found in the instructions for this information return.

Form 8865.   You may need to file Form 8865 to report any of the following events.

• You acquired a foreign partnership interest.
• You disposed of a foreign partnership interest.
• Your proportional interest (percentage owned) in a foreign partnership has changed.

If Form 8865 is required, you must attach it to your income tax return and file both by the due date (including extensions) for that return. You can find more information about filing Form 8865 in the instructions for this information return.

Form 3520.   You may have to file Form 3520 if:

• You are involved in the creation of a foreign trust,
• You are involved in the transfer of money or property to a foreign trust,
• You are treated as the owner of any part of the assets of a foreign trust under the grantor trust rules,
• You received a distribution from a foreign trust,
• A related foreign trust held an outstanding obligation issued by you (or a person related to you),
• You received more than $100,000 from a nonresident alien individual or a foreign estate (including foreign persons related to the individual or estate) that you treated as gifts or bequests, or
• You received more than $11,642 from foreign corporations or foreign partnerships (including foreign persons related to the corporations or partnerships) that you treated as gifts.

If Form 3520 is required, you generally must file it at the time you file your income tax return. Send Form 3520 to the:

Internal Revenue Service Center
Philadelphia, PA 19255.

More information about the filing of Form 3520 can be found in the instructions for the form.

Form 4790.   Form 4790, Report of International Transportation of Currency or Monetary Instruments, must be filed by each person who physically transports, mails, ships, or causes to be physically transported, mailed, or shipped into or out of the United States, currency or other monetary instruments totaling more than $10,000 at one time. The filing requirement also applies to any person who attempts to transport, mail, or ship the currency or monetary instruments or attempts to cause them to be transported, mailed, or shipped. Form 4790 must also be filed by certain recipients of currency or monetary instruments.

The term monetary instruments includes coin and currency of the United States or of any other country, money orders, traveler's checks, investment securities in bearer form or otherwise in such form that title passes upon delivery, and negotiable instruments (except warehouse receipts or bills of lading) in bearer form or otherwise in such form that title passes upon delivery. The term includes bank checks, and money orders that are signed, but on which the name of the payee has been omitted. The term does not include bank checks, or money orders made payable to the order of a named person that have not been endorsed or that bear restrictive endorsements.

A transfer of funds through normal banking procedures (wire transfer) that does not involve the physical transportation of currency or bearer monetary instruments is not required to be reported on Form 4790.

Recipients.   Each person who receives currency or other monetary instruments from a place outside the United States for which a report has not been filed by the shipper must file Form 4790.

It must be filed within 15 days after receipt with the Customs officer in charge at any port of entry or departure, or by mail with the:

Commissioner of Customs
Attention: Currency Transportation
Reports
Washington, DC 20229.

Shippers or mailers.   If the currency or other monetary instrument does not accompany a person entering or departing the United States, Form 4790 can be filed by mail with the Commissioner of Customs at the above address. It must be filed by the date of entry, departure, mailing, or shipping.

Travelers.   Travelers carrying currency or other monetary instruments must file Customs Form 4790 with the Customs officer in charge at any Customs port of entry or departure when entering or departing the United States.

Penalties.   Civil and criminal penalties are provided for failure to file a report, supply information, and for filing a false or fraudulent report. Also, the entire amount of the currency or monetary instrument may be subject to seizure and forfeiture.

More information about the filing of Form 4790 can be found in the instructions on the back of the form.

Form TD F 90-22.1.   Form TD F 90-22.1 must be filed if you had any financial interest in, or signature or other authority over, a bank, securities, or other financial account in a foreign country. You do not have to file the report if the assets are with a U.S. military banking facility operated by a U.S. financial institution or if the combined assets in the account(s) are $10,000 or less during the entire year.

You must file this form by June 30 each year with the Department of the Treasury at the address shown on the form. Form TD F 90-22.1 is not a tax return, so do not attach it to your Form 1040.

Withholding Tax

Topics

This chapter discusses:

• Withholding income tax from the pay of U.S. citizens,
• Withholding tax at a flat rate, and
• Social security and Medicare taxes.

Useful Items You may want to see:

Publication

• 505   Tax Withholding and Estimated Tax

Form (and Instructions)

• 673   Statement For Claiming Benefits Provided by Section 911 of the Internal Revenue Code
• W-4   Employee's Withholding Allowance Certificate
• W-9   Request for Taxpayer Identification Number and Certification

See chapter 7 for information about getting these publications and forms.

Form 673

Income Tax Withholding

U.S. employers generally must withhold U.S. income tax from the pay of U.S. citizens working abroad unless the employer is required by foreign law to withhold foreign income tax.

Your employer does not have to withhold U.S. income tax from any wages earned abroad that you can reasonably be expected to exclude under either the foreign earned income exclusion or the foreign housing exclusion.

Statement.   You can give a statement to your employer indicating that you will meet either the bona fide residence test or the physical presence test and indicating your estimated housing cost exclusion.

Form 673 is an acceptable statement. You can use Form 673 only if you are a U.S. citizen. You do not have to use the form. You can prepare your own statement. See the next page for a copy of Form 673.

Give the statement to your employer and not to the IRS.

Generally, your employer can stop the withholding once you submit a signed statement that includes a declaration under penalties of perjury. However, if your employer has reason to believe that you will not qualify for either the foreign earned income or the foreign housing exclusion, your employer must continue to withhold.

In determining whether your foreign earned income is more than the limit on either the foreign earned income exclusion or the foreign housing exclusion, your employer must consider any information about pay you received from any other source outside the United States.

Your employer should withhold taxes from any wages you earn for working in the United States.

Foreign tax credit.   If you plan to take a foreign tax credit, you may be eligible for additional withholding allowances on Form W-4. You can take these additional withholding allowances only for foreign tax credits attributable to taxable salary or wage income.

Withholding from pension payments.   U.S. payers of benefits from employer-deferred compensation plans, individual retirement plans, and commercial annuities generally must withhold income tax from the payments or distributions they make to you. Withholding will apply unless you choose exemption from withholding. You cannot choose exemption unless you:

1. Provide the payer of the benefits with a residence address in the United States or a U.S. possession, or
2. Certify to the payer that you are not a U.S. citizen or resident alien or someone who left the United States to avoid tax.

Check your withholding.   Before you report U.S. income tax withholding on your tax return, you should carefully review all information documents, such as Form W-2, Wage and Tax Statement, and the Form 1099 information returns. Compare other records, such as final pay records or bank statements, with Form W-2 or Form 1099 to verify the withholding on these forms. Check your U.S. income tax withholding even if you pay someone else to prepare your tax return. You may be assessed penalties and interest if you claim more than your correct amount of withholding.

30% Flat Rate Withholding

Generally, U.S. payers of income other than wages, such as dividends and royalties, are required to withhold tax at a flat 30% (or lower treaty) rate on nonwage income paid to nonresident aliens. If you are a U.S. citizen or resident and this tax is withheld in error from payments to you because you have a foreign address, you should notify the payer of the income to stop the withholding. Use Form W-9 to notify the payer.

You can claim the tax withheld in error as a withholding credit on your tax return if the amount is not adjusted by the payer.

Social Security and Medicare Taxes

Social security and Medicare taxes may apply to wages paid to an employee regardless of where the services are performed.

General Information

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.

1. You perform the services on or in connection with an American vessel or aircraft (defined later) and either:
   1. You entered into your employment contract within the United States, or
   2. The vessel or aircraft touches at a U.S. port while you are employed on it.
2. You are working in one of the countries with which the United States has entered into a binational social security agreement (discussed later).
3. You are working for an American employer (defined later).
4. You are working for a foreign affiliate (defined later) of an American employer under a voluntary agreement entered into between the American employer and the U.S. Treasury Department.

American vessel or aircraft.   An American vessel is any vessel documented or numbered under the laws of the United States and any other vessel whose crew is employed solely by one or more U.S. citizens, residents, or corporations. An American aircraft is an aircraft registered under the laws of the United States.

American employer.   An American employer includes any of the following employers.

1. The U.S. Government or any of its instrumentalities.
2. An individual who is a resident of the United States.
3. A partnership of which at least two-thirds of the partners are U.S. residents.
4. A trust of which all the trustees are U.S. residents.
5. A corporation organized under the laws of the United States, any U.S. state, or the District of Columbia, Puerto Rico, the Virgin Islands, Guam, or American Samoa.

Foreign affiliate.   A foreign affiliate of an American employer is any foreign entity in which the American employer has at least a 10% interest, directly or through one or more entities. For a corporation, the 10% interest must be in its voting stock. For any other entity, the 10% interest must be in its profits.

Form 2032, Contract Coverage Under Title II of the Social Security Act, is used by American employers to extend social security coverage to U.S. citizens and residents working abroad for foreign affiliates of the American employers. Coverage under an agreement in effect on or after June 15, 1989, cannot be terminated.

Excludable meals and lodging.   Social security tax does not apply to the value of meals and lodging provided to you for the convenience of your employer and excluded from your income.

Binational Social Security (Totalization) Agreements

The United States has entered into agreements with several foreign countries to coordinate social security coverage and taxation of workers who are employed in those countries. These agreements are commonly referred to as totalization agreements and are in effect with the following countries.

Australia (eff. 10/1/02)	Italy
Austria	Luxembourg
Belgium	Netherlands
Canada	Norway
Chile	Portugal
Finland	South Korea
France	Spain
Germany	Sweden
Greece	Switzerland
Ireland	United Kingdom

(you pay social security taxes to only one country.)

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 can get more information on any specific agreement by contacting the United States Social Security Administration. If you have access to the Internet, you can get more information at: http://www.ssa.gov/international

Covered by U.S. only

If your pay in a foreign country is subject only to U.S. social security tax and is exempt from foreign social security tax, your employer should get a certificate of compliance from the:

U.S. Social Security Administration
Office of International Programs
P.O. Box 17741
Baltimore, MD 21235-7741.

Covered by foreign country only

If you are permanently working in a foreign country with which the United States has a social security agreement and, under the agreement, your pay is exempt from U.S. social security tax, you or your employer should get a statement from the authorized official or agency of the foreign country verifying that your pay is subject to social security coverage in that country.

If the authorities of the foreign country will not issue such a statement, either you or your employer should get a statement from the U.S. Social Security Administration, Office of International Programs, at the above address. The statement should indicate that your wages are not covered by the U.S. social security system.

This statement should be kept by your employer because it establishes that your pay is exempt from U.S. social security tax.

Only wages paid on or after the effective date of the totalization agreement can be exempt from U.S. social security tax.

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