Abacus Expatriate Services
For US citizens and green card holders living abroad, there are special
rules regarding the filing of US tax returns. In addition, these individuals
can benefit from our online cash management and investment management
services to provide a complete Expatriate Plan, to maximize the use of
offshore investments, asset protection and tax minimization.
There are special rules that apply to people on the move. When traveling
away from your tax home for extended periods of time, you're out of pocket
expenses for meals and lodging may be deductible. These rules may also
apply to taxpayers in the transportation industry.
Merchant Marines are entitled to per diem deductions for incidental expenses
while out to sea and away from their home port. In order to claim these
expenses, the taxpayer need only prove his/her days away from home. Coast
Guard discharges and ports of call including days at sea are all that
is needed. If the Coast Guard does not cover you, your Ship's Assignment
Letter showing assigned days and ports of call is acceptable. Your ship's
itinerary is most helpful for proof of your ports. Please contact us for
our entire Merchant Marine package, sent via email.
Expatriates and taxes
U. S. citizens and resident aliens ("Green Card" holders) living
or traveling outside the United States generally are required to file
income tax returns, estate tax returns, and gift tax returns and pay estimated
tax in the same way as those residing in the United States.
Even though the United States is one of the few countries in the world
that requires its citizens to file an annual tax return no matter where
in the world they are living and/or working, there are some tax advantages
available to those taxpayers working outside of the U.S. These tax breaks
Foreign Earned Income Exclusion
If you meet certain requirements, you may qualify for the foreign earned
income and foreign housing exclusions and the foreign housing deduction
(also known as Section 911 Exclusion). If you are a U.S. citizen or a
resident alien of the United States and live abroad, you are taxed on
your worldwide income. However, you may qualify to exclude up to $80,000
of your foreign earned income. In addition, you can exclude or deduct
certain foreign housing amounts.
To claim the foreign earned income exclusion, the foreign housing exclusion,
or the foreign housing deduction, you must have foreign earned income,
your tax home must be in a foreign country, and you must be one of the
- Bona Fide Residence Test:
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
(January 1 through December 31)
A U.S. resident alien who is a citizen or national of a country with
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
- Physical Presence Test:
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.
- If you qualify under either the bona fide residence
test or the physical presence test for only part of the tax year:
you must adjust the maximum exclusion limit based on the number of qualifying
days in your tax year. The number of qualifying days in your tax year
is the number of days within the period you have your tax home in a
foreign country and meet either test.
How to make a claim or
file for the following:
Foreign Earned Income Exclusion
Foreign Housing Exclusion
You must file Form 2555, Foreign Earned Income with your tax return.
All tax returns that contain a Form 2555 must be filed with the Internal
Revenue Service Center, Philadelphia, PA 19255.
It is important to keep a travel calendar starting with the first day
you leave the United States. This travel calendar is essential to determine
when or if you have qualified for the foreign earned income exclusion
under the physical presence test. A small pocket calendar is the easiest
Foreign Housing Exclusion or Deduction
In addition to the foreign earned income exclusion, you can also separately
claim exclusion or a deduction from gross income for your housing amount
if your tax home is in a foreign country and you qualify under either
the bona fide residence test or the physical presence test.
Qualified Housing: Keep all receipts and canceled checks to substantiate
your housing expenses. You will also need to be able to identify amounts
that are reimbursed and those that are not reimbursed. You will also need
to indicate whether you pay your housing expenses directly or if the company
pays these expenses directly to a third party on your behalf.
Foreign Tax Credits
When claiming Foreign Tax Credits and Foreign Taxes Paid or Accrued,
generally speaking, you are allowed a credit against your U.S. income
tax for all or part of the income taxes you pay to foreign countries.
In some countries, payment of Social Security-type taxes is also required.
If you take the foreign tax credit, you must file Form 1116, Foreign
Tax Credit, with Form 1040. Form 1116 enables you figure the amount of
foreign tax paid or accrued that you can claim as a foreign tax credit.
The foreign tax credit is limited to the part of your total U.S. tax
that is in proportion to your taxable income from sources outside the
United States compared to your total taxable income. The allowable foreign
tax credit may not be more than your actual foreign tax liability.
Instead of taking the foreign tax credit, you can deduct foreign income
taxes as an itemized deduction on Schedule A (Form 1040). This is usually
not advantageous; taking the foreign tax credit is usually more effective
in reducing your tax liability, particularly if your itemized deductions
are subject to the phase-out rules for high-adjusted gross income.
If you are a U.S. citizen or resident alien and both your tax home and
your abode are outside the United States and Puerto Rico on the regular
due date of your return (April 15), you are automatically granted a 2-month
extension to file your return and pay any tax due (June 15).
Your return is considered filed on time if it is postmarked on or before
midnight of the due date for filing the return (including any extensions).
None of the dates for filing returns or paying taxes is extended due to
If you use the 2-month extension discussed above, you must attach a statement
to your return showing that you qualify for it. Write or type the following
at the top of the first page of the Form 1040 and on the bottom of the
second page of the Form 1040: "Extension automatically granted to
June 15, 20-pursuant to Reg. 1.6081-5."
Foreign Bank Account
If you have funds in a foreign bank, you are required to file Treasury
Form, 90-22.1, but only if your funds exceed $10,000. If you have a foreign
account, but the balance does not exceed $10,000 during the calendar year,
then instead of filing Treasury Form 90-22.1, at the bottom of Schedule
B, Interest Income, the question "Do you have a foreign bank account?"
will be answered "No".
Dual Status and Non Resident Aliens
A resident alien is generally taxed, as is a U.S. citizen, on his worldwide
income. In contrast, nonresident alien individuals are not taxed on their
worldwide income. Instead, a special regime is applied to them. If the
nonresident alien individual is not engaged in a U.S. trade or business,
he is subject to a flat tax of 30% (or lower treaty rate) on the gross
amount of certain kinds of U.S. source income (generally speaking, his
passive investment income). That tax is usually withheld by the U.S. payor
at the source.
A NRA who is engaged in a U.S. trade or business but does not maintain
an office in the US is subject to tax on only what is physically earned
in the US. But if there is an office in the United States, certain limited
kinds of foreign source income may be treated as effectively connected
with his U.S. trade or business and thereby be included in his U.S. tax
Since the starting point for either scheme is the resident versus nonresident
status of the alien individual, the concept of "residence" for
that purpose is a key determinant.
An alien individual is a resident alien if he meets the lawful permanent
residence test or the substantial presence test, or if he elects to be
treated as a resident alien. Terms for these tests are defined positively.
"Nonresident alien" is defined negatively. That is, a nonresident
alien is a person who is neither a U.S. citizen nor a resident alien.
An alien individual is a lawful permanent resident if he or she has lawfully
been granted the privilege of residing permanently in the United States
as an immigrant in accordance with the immigration laws and
That status has not been rescinded or administratively or judicially
determined to have been abandoned.
The evidence of being accorded lawful permanent resident status is the
"green card," Immigration Form I-551, which is obtained as a
receipt for an immigrant visa. An application for a green card must state
whether the applicant is required to file a federal tax return for his
three most recent taxable years. There is a $500 penalty for each failure
to provide such a statement.
Resident Alien status is based on intent and can apply to the Aliens'
first day in the US.
Termination of Lawful Permanent Residence Status
occurs if a final administrative or judicial order of exclusion or deportation
is issued to the individual alien. If the alien initiates the matter,
he is deemed to abandon his resident status for purposes of the lawfully
admitted test when he files his application for abandonment or a letter
stating his intention to abandon resident status, enclosing his alien
If a nonresident alien is not physically present for more than 30 days
during the calendar year in question, the substantial presence test is
not applied for that year even if the three-year total presence of the
alien is 183 days or more.
An alien individual who is physically present in this country is treated
as if he were not present on any day on which he is an "exempt individual"
for purposes of the substantial presence test.
Regular Member of Crew of Foreign Vessel
For taxable years beginning after 1997, an individual who is temporarily
present in the United States on any day as a regular member of the crew
of a foreign vessel engaged in transportation between the United States
and a foreign country or U.S. possession is not treated as present in
the United States on such day for purposes of the substantial presence
test unless the individual otherwise engages in a U.S. trade or business
on such day.
The alien's statement is included with Form 1040 (return for a U.S. citizen
or resident alien) or Form 1040NR (return for nonresident alien), if those
returns are otherwise required to be filed. If no such return is required,
the alien must file the statement with the Philadelphia Internal Revenue
Service Center. Failure to file the statement, if one is required, results
in the loss of the use of the closer-connection exemption for counting
days of U.S. presence.
Resident Status and Tax Treaties
An individual can qualify both as a resident alien under U.S. law and
as a resident of a foreign country under that country's law. In the absence
of a tax treaty, the individual may be fully subject to tax in both jurisdictions
on the basis of residence. Some, but not all, U.S. income tax treaties
contain a tiebreaker clause to resolve that problem.
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