| Pub. 593, Tax Highlights for U.S. Citizens and Residents Going Abroad |
2005 Tax Year |
Publication 593 - Main Contents
The U.S. filing requirements for U.S. citizens and resident aliens in foreign countries are generally the same as those for
citizens and residents
living in the United States.
Who must file.
Your age, filing status, gross income, and whether you can be claimed as a dependent by another taxpayer determine
whether you must file a U.S.
federal income tax return. To determine if you meet the gross income requirement for filing purposes, you must include all
income you receive from
foreign sources as well as your U.S. income. This is true even if:
-
The income is paid in foreign money,
-
The foreign country imposes an income tax on that income, or
-
The income is excludable under the foreign earned income exclusion, discussed later.
Self-employed persons.
You must file a U.S. income tax return if you had $400 or more of net earnings from self-employment, regardless of
your age. Net earnings from
self-employment include income earned both in a foreign country and in the United States.
You must pay self-employment tax on your self-employment income even if it is earned in a foreign country and is excludable
as foreign earned
income in figuring your income tax.
When to file.
If your tax year is the calendar year, the due date for filing your income tax return is usually April 15 of the following
year.
Extensions of time to file.
You are automatically granted an extension to June 15 to file your return and pay any tax due if you are a U.S. citizen
or resident, and on the
regular due date of your return:
-
You are living outside of the United States and Puerto Rico, and your main place of business or post of duty is outside of
the United States
and Puerto Rico, or
-
You are in military or naval service on duty outside the United States and Puerto Rico.
You must pay interest on any unpaid tax from the regular due date to the date you pay the tax.
You do not have to file a special form to receive this extension. You must, however, attach a statement to your tax
return explaining what
situation qualified you for the extension.
It may benefit you to file for an additional extension of time to file. You may benefit if, on the due date for filing,
you have not yet met either
the bona fide residence test or the physical presence test, but you expect to qualify after the automatic extension discussed
above. To obtain an
additional extension, file Form 2350, Application for Extension of Time To File U.S. Individual Income Tax Return, with the
Internal Revenue Service
Center in Philadelphia or your local IRS representative. You must file Form 2350 after the close of your tax year but before
the end of the first
extension. If an additional extension is granted, it will be to a date after you expect to meet the time requirements for
the bona fide residence or
the physical presence test.
Where to file.
If any of the following situations apply to you, you should file your return with the Internal Revenue Service Center,
Austin, TX 73301-0215.
-
You claim the foreign earned income exclusion.
-
You claim the foreign housing exclusion or deduction.
-
You use an APO or FPO address.
-
You live in a foreign country or are a resident, for tax purposes, of a foreign country.
All other taxpayers should see Publication 54 or the instructions for Form 1040.
Foreign bank and financial accounts.
If you had any financial interest in, or signature or other authority over a bank account, securities account, or
other financial account in a
foreign country at any time during the tax year, you may have to complete Treasury Department Form TD F 90-22.1, Report of
Foreign Bank and Financial
Accounts and file it with the Department of the Treasury at the address listed on the form. You need not file this form if
the combined assets in the
account(s) are $10,000 or less during the entire year, or if the assets are with a U.S. military banking facility operated
by a U.S. financial
institution.
You can get Form TD F 90-22.1 from the offices listed at the end of this publication or through the IRS website at
www.irs.gov.
Estate and gift taxes.
Under certain conditions, you may have to file a federal estate or gift tax return. For more information, see Publication
950, Introduction to
Estate and Gift Taxes.
You can also request additional information by writing to:
Internal Revenue Service
International Estate Tax
1111 Constitution Ave. NW - LE-4435
Washington, DC 20024.
You may qualify for an exclusion from tax of a limited amount of income earned while working abroad. However, you must file
a tax return to claim
it. In general, foreign earned income is income received for services you perform in a foreign country. You also may be able
to claim an exclusion or
a deduction from gross income for your reasonable housing costs that are over a certain base amount. Generally, you will qualify
for these benefits if
your tax home (defined later) is in a foreign country, or countries, throughout your period of bona fide foreign residence
or physical presence and
you are one of the following:
-
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,
or
-
A U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect
and who is a
bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year, or
-
A U.S. citizen or a U.S. resident alien who is physically present in a foreign country or countries for at least 330 full
days during any
period of 12 consecutive months.
Tax home.
Your tax home is the general area of your main place of business, employment, or post of duty where you are permanently
or indefinitely engaged to
work. You are not considered to have a tax home in a foreign country for any period during which your abode is in the United
States. However, being
temporarily present in the United States, or maintaining a dwelling there, does not necessarily mean that your abode is in
the United States. For
details, see Publication 54.
Foreign country.
A foreign country, for this purpose, means any territory under the sovereignty of a government other than that of
the United States, including
territorial waters (determined under U.S. laws) and air space. A foreign country also includes the seabed and subsoil of those
submarine areas which
are adjacent to the territorial waters of the foreign country and over which it has exclusive rights under international law
to explore and exploit
natural resources. For this purpose, U.S. possessions or territories are not foreign countries.
Waiver of time requirements.
You may not have to meet the minimum time requirements for bona fide residence or physical presence if you have to
leave the foreign country
because war, civil unrest, or similar adverse conditions in the country prevented you from conducting normal business. You
must, however, be able to
show that you reasonably could have expected to meet the minimum time requirements if the adverse conditions had not occurred.
A list of countries qualifying for the waiver is published in the Internal Revenue Bulletin (IRB). You can read the
IRB on the Internet at
www.irs.gov. Or, you can get a copy of the list by writing to :
Internal Revenue Service
International Section
P.O. Box 920
Bensalem, PA 19020-8518
Travel restrictions.
If you violate U.S. travel restrictions, you will not be treated as being a bona fide resident of, or physically present
in, a foreign country for
any day during which you are present in a country in violation of the restrictions. (These restrictions generally prohibit
U.S. citizens and residents
from engaging in transactions related to travel to, from, or within certain countries.) Also, income that you earn from sources
within such a country
for services performed during a period of travel restrictions does not qualify as foreign earned income. Housing expenses
that you incur within that
country (or outside that country for housing your spouse or dependents) while you are in violation of travel restrictions
cannot be included in
figuring your foreign housing amount.
As of January 1, 2006, these travel restrictions apply only to Cuba.
Exclusion of foreign earned income.
If your tax home is in a foreign country and you meet either the bona fide residence test or the physical presence
test, you can choose to exclude
from gross income a limited amount of your foreign earned income. Your income must be for services performed in a foreign
country during your period
of foreign residence or presence, whichever applies. You cannot, however, exclude the pay you receive as an employee of the
U.S. Government or its
agencies.
Credits and deductions.
If you claim the exclusion, you cannot claim any credits or deductions that are related to the excluded income. Thus,
you cannot claim a foreign
tax credit or deduction for any foreign income tax paid on the excluded income. Nor can you claim the earned income credit
if you claim the exclusion.
Also, for IRA purposes, the excluded income is not considered compensation and, for figuring deductible contributions when
you are covered by an
employer retirement plan, the excluded income is included in your modified adjusted gross income.
Amount excludable.
If your tax home is in a foreign country and you qualify under either the bona fide residence test or the physical
presence test for the entire tax
year, you can exclude up to $80,000 of your foreign income earned during the year. Beginning in 2008, the $80,000 amount will
be adjusted for
inflation.
If you qualify under either test for only part of the year, you must reduce ratably the maximum amount based on the
number of days within the tax
year you qualified under one of the two tests.
Housing amount.
If your tax home is in a foreign country and you meet either the bona fide residence test or the physical presence
test, you may be able to claim
an exclusion or a deduction from gross income for a housing amount.
A housing amount is the excess, if any, of your allowable housing expenses for the tax year over a base amount. Allowable
housing expenses are the
reasonable expenses (such as rent, utilities other than telephone charges, and real and personal property insurance) paid
or incurred during the tax
year by you, or on your behalf, for your foreign housing and that of your spouse and dependents if they lived with you. You
can include the rental
value of housing provided by your employer in return for your services. You can also include the allowable housing expenses
of a second foreign
household for your spouse and dependents if they did not live with you because of dangerous, unhealthy, or otherwise adverse
living conditions at your
tax home. Allowable housing expenses do not include the cost of home purchase or other capital items, wages of domestic servants,
or deductible
interest and taxes.
The base amount is 16% of the annual salary of a GS-14, step 1, U.S. Government employee, figured on a daily basis,
times the number of days during
the year that you meet the bona fide residence test or the physical presence test. The annual salary is determined on January
1 of the year in which
your tax year begins. You figure the base amount on Form 2555.
Exclusion.
You can exclude (up to the limits) your entire housing amount from income if it is considered paid for with employer-provided
amounts.
Employer-provided amounts are any amounts paid to or for you by your employer, including your salary, housing reimbursements,
and the fair market
value of pay given in the form of goods and services. If you have no self-employment income, your entire housing amount is
considered paid for with
employer-provided amounts.
If you claim the exclusion, you cannot claim any credits or deductions related to excluded income, including a credit
or deduction for any foreign
income tax paid on the excluded income.
Deduction.
If you are self-employed and your housing amount is not provided by an employer, you can deduct it in arriving at
your adjusted gross income.
However, the deduction cannot be more than your foreign earned income for the tax year minus the total of your excluded foreign
earned income plus
your housing exclusion.
Carryover.
If you cannot deduct all of your housing amount in a tax year because of the limit, you can carry over the unused
part to the following year only.
If you cannot deduct it in the following year, you cannot carry it over to any other year. You deduct the carryover in figuring
adjusted gross income.
The amount of carryover you can deduct is limited to your foreign earned income for the year of the carryover minus the total
of your foreign earned
income exclusion, housing exclusion, and housing deduction for that year.
Choosing the exclusion(s).
You make separate choices to exclude foreign earned income and/or to exclude or deduct your foreign housing amount.
If you choose to take both the
foreign housing exclusion and the foreign earned income exclusion, you must figure your foreign housing exclusion first. Your
foreign earned income
exclusion is then limited to the smaller of (a) your annual exclusion limit or (b) the excess of your foreign earned income
over your foreign housing
exclusion.
Once you choose to exclude your foreign earned income or housing amount, that choice remains in effect for that year
and all future years unless
you revoke it. You can revoke your choice for any tax year. However, if you revoke your choice for a tax year, you cannot
claim the exclusion again
for your next 5 tax years without the approval of the IRS. For more information on revoking the exclusion, see chapter 4 of
Publication 54.
Married couples.
If both you and your spouse are eligible for the exclusion(s), see chapter 4 of Publication 54.
Exclusion of employer-provided meals and lodging.
If as a condition of employment you are required to live in a camp in a foreign country that is provided by or for
your employer, you can exclude
the value of any meals and lodging furnished to you, your spouse, and your dependents. For this exclusion, a camp is lodging
that is:
-
Provided for your employer's convenience because the place where you work is in a remote area where satisfactory housing is
not available to
you on the open market within a reasonable commuting distance,
-
Located as close as practicable in the area where you work, and
-
Provided in a common area or enclave that is not available to the public for lodging or accommodations and that normally houses
at least 10
employees.
Tax Withholding and Estimated Tax
Generally, you must pay U.S. tax on income earned abroad in the same way you pay the tax on income earned in the United States.
If you are an
employee of a U.S. company, your employer probably withholds income tax from your pay. If income tax is not withheld or if
not enough tax is withheld,
you might have to pay estimated tax.
Withholding tax.
You may be able to have your employer discontinue withholding income tax from all or a part of your wages. You can
do this if you expect to qualify
for the income exclusions under either the bona fide residence test or the physical presence test. See Publication 54 for
information.
Withholding from pension payments.
U.S. payers of benefits from employer deferred compensation plans (such as employer pension, annuity, or profit-sharing
plans), individual
retirement plans, and commercial annuities generally must withhold income tax from the payments or distributions. Withholding
will apply unless you
choose exemption from withholding. You cannot choose exemption unless you provide the payer of the benefits with a residence
address in the United
States or a U.S. possession or unless you 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.
For rules that apply to nonperiodic distributions from qualified employer plans and tax-sheltered annuity plans, get
Publication 575, Pension and
Annuity Income.
Estimated tax.
Because foreign employers generally do not withhold U.S. tax from your wages, you may have to pay estimated tax if
you are working abroad for a
foreign employer. Your estimated tax is the total of your estimated income tax and self-employment tax for the year minus
your expected withholding
for the year.
When you estimate your gross income, do not include the income that you expect to exclude. You can subtract from income
your estimated housing
deduction in figuring your estimated tax liability. However, if the actual exclusion or deduction is less than you expected,
you may be subject to a
penalty on the underpayment.
Use Form 1040-ES, Estimated Tax for Individuals, to estimate your tax. The requirements for filing and paying estimated
tax are generally the same
as those you would follow if you were in the United States.
In some cases, foreign income tax you pay can be credited against your U.S. tax liability or deducted in figuring taxable
income on your U.S.
income tax return. It is usually to your advantage to claim a credit for foreign taxes rather than to deduct them. A credit
reduces your U.S. tax
liability, and any excess can be carried back and carried forward to other years. A deduction only reduces your taxable income
and can be taken only
in the current year. You generally cannot deduct some foreign income taxes and take a credit for others.
Tax credit.
If you choose to credit foreign taxes against your tax liability, you generally must complete Form 1116, Foreign Tax
Credit (Individual, Estate,
Trust, or Nonresident Alien Individual), and attach it to your U.S. income tax return. Do not include the foreign taxes paid
or accrued as withheld
income taxes on Form 1040.
Limit.
Your credit cannot be more than the part of your U.S. income tax liability based on your taxable income from sources
outside the United States. So,
if you have no U.S. income tax liability, or if all your foreign income is excludable, you will not be able to claim a foreign
tax credit.
If the foreign taxes you paid or incurred during the year are more than the limit on your credit for the current year,
you can carry back the
unused foreign taxes as credits to the previous tax year and then carry forward any remaining unused foreign taxes to the
next 10 tax years.
You will not be subject to this limit and may be able to claim the credit without using Form 1116 if the following requirements
are met.
-
You are an individual.
-
Your only foreign source income for the tax year is passive income (dividends, interest, royalties, etc.) that is reported
to you on a payee
statement (such as a Form 1099-DIV or 1099-INT).
-
Your qualified foreign taxes for the tax year are not more than $300 ($600 if filing a joint return) and are reported on a
payee
statement.
-
You elect this procedure for the tax year.
If you make this election, you cannot carry back or carry over any unused foreign tax to or from this tax year.
Foreign taxes paid on excluded income.
You cannot claim a credit for foreign taxes paid on amounts excluded from gross income under the foreign earned income
exclusion or the housing
amount exclusion, discussed earlier.
Deduction.
If you choose to deduct all foreign income taxes on your U.S. income tax return, itemize the deduction on Schedule
A (Form 1040). You cannot deduct
foreign taxes paid on income you exclude from your U.S. income tax return.
More information.
The foreign tax credit and deduction, their limits, and the carryback and carryover provisions are discussed in detail
in Publication 514.
U.S. tax treaties or conventions with many foreign countries entitle U.S. residents to certain credits, deductions, exemptions,
and reduced foreign
tax rates. In this way, you may be able to pay less tax to those countries.
For example, most tax treaties allow U.S. residents to exempt part or all of their income for personal services from the treaty
country's income
tax if they are in the treaty country for a limited number of days.
Treaties also generally provide U.S. students, teachers, and trainees with special exemptions from the foreign treaty country's
income tax.
Publication 901 contains detailed information on tax treaties and tells you where you can get copies of them.
You can get help from the IRS in several ways. The IRS has combined special forms and instructions as well as Publication
54 in Package 1040-7 for
U.S. citizens and residents living abroad.
You can get the package and additional assistance by writing to:
Internal Revenue Service
International Section
P.O. Box 920
Bensalem, PA 19020-8518
During the filing period, you can also get the necessary federal income tax forms and publications from U.S. embassies and
consulates.
You can also call your nearest U.S. embassy or consulate, or the IRS office numbers listed below, to find out when and where
assistance will be
available. These IRS telephone numbers include the country and city codes required if you are outside the local dialing area.
Note.
These are the locations and numbers in effect on January 1, 2006.
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