Aliens and U.S. Citizens Living Abroad
Aliens and U.S. Citizens Living Abroad remain subject to U.S. federal income tax and at times state and city income taxes. Generally this pertains to Aliens and U.S. Citizens Living Abroad. Accordingly, U.S. citizens and resident aliens working abroad must continue filing tax returns in the United States.
Tax treatment of Aliens and U.S. Citizens Living Abroad
Aliens and U.S. Citizens Living Abroad are subject to tax at graduated rates on all income from worldwide sources.
Types of taxable compensation
Generally, the following types of compensation are taxable in the United States, but this list is not all-inclusive.
• Base salary and bonuses
• Cost of living allowance
• Housing allowance
• Education allowance for children
• Home leave reimbursements
• Reimbursement of host/home country taxes
• Personal use of company car
• Certain moving allowances
• Stock options
Foreign earned income and housing exclusions
Many Aliens and U.S. Citizens Living Abroad who are working abroad are subject to tax in the foreign country in which they are working. In order to minimize the burden of double taxation, the U.S. tax system allows for foreign earned income (FEI) and housing exclusions as well as a credit or deduction for foreign taxes paid.
The FEI exclusion allows certain qualified Aliens and U.S. Citizens Living Abroad to exclude from gross income up to $92,900 (2011 ceiling) of FEI (income related to services performed outside of the United States). In addition, a qualified taxpayer may also elect to exclude from gross income employer-provided foreign housing expenses to the extent the expenses exceed the base housing amount determined by the IRS.
In order to qualify for either of these exclusions, an individual’s tax home must be in a foreign country. “Tax home” is generally defined as where an individual’s principal place of business is located, regardless of where the family home is maintained.
In addition to having a tax home in a foreign country, the individual must also meet either the “bona fide residence” test or the “physical presence test.”
Bona fide residence test
Generally, Aliens and U.S. Citizens Living Abroad may meet the bona fide residence test if he or she resides in a foreign country for an uninterrupted period that includes one full calendar year. In determining whether or not an individual will meet the bona fide residence test, the taxpayer’s particular facts and circumstances also need to be reviewed, including intentions related to the length and nature of the stay overseas.
Generally, a resident alien of the United States (non-U.S. citizen) must utilize the physical presence test in order to qualify for either the FEI or housing exclusions. However, citizens of certain foreign countries that have treaties with the United States may be able to utilize the bona fide residence test under the terms set forth in the treaties.
Physical presence test
A Aliens and U.S. Citizens Living Abroad of the United States may qualify for the FEI and housing exclusions under the physical presence test if he/she is present outside of the United States for 330 days out of any consecutive 12-month period.
Only whole days are considered for purposes of counting days outside of the United States under the physical presence test. A whole day is defined as a full 24- hour period beginning with midnight and ending with midnight. Therefore, days of arrival in or departure from the foreign country in relation to travel to and from the United States do not generally count as full days in the foreign country.
Electing the exclusions
An individual who qualifies under either the bona fide residence or physical presence tests must make separate elections with respect to the FEI exclusion and housing exclusion. These elections are made by filing Form 2555 with the taxpayer’s federal income tax return.
Foreign tax deduction or credit
In addition to the FEI and housing exclusions, Aliens and U.S. Citizens Living Abroad are also allowed either a deduction or credit against U.S. income tax for qualified income taxes paid or accrued during the tax year to any foreign country or U.S. possession.
It is the taxpayer’s choice to take a credit or deduction for foreign taxes paid or accrued during the tax year. Generally, it is more advantageous to the taxpayer to take a credit for the foreign taxes because the credit will reduce U.S. tax liability on a dollar-for-dollar basis. Individuals who choose to deduct foreign taxes must take them as itemized deductions, which will only reduce the taxpayer’s income subject to U.S. tax.
In determining the amount of foreign tax credit allowed, the taxpayer is subject to an overall limitation that prevents them from taking a foreign tax credit against the portion of U.S. tax liability associated with U.S.-source income. Essentially, the foreign tax credit is limited to the portion of U.S. income tax related to foreign-source income (income associated with services performed outside the United States).
In addition, an individual claiming either the FEI exclusion or housing exclusion is not allowed to take a tax credit against the foreign-source income excluded from U.S. taxation as a result of these elections.
Taxpayers who are unable to utilize the full amount of foreign taxes available for credit due to limitation will carry back unused foreign taxes one year then carry forward for up to 10 years.
Due dates and extensions
Aliens and U.S. Citizens Living Abroad are required to file by April 15 following the end of the tax year (Dec. 31). For taxpayers who have a tax home outside the United States on April 15, the due date for filing and payment of any balances of tax due is automatically extended to June 15.
On or before April 15, a Form 4868– Automatic Extension of Time may be filed by the U.S. resident for a six-month extension to Oct. 15. On or before June 15, the taxpayer with his tax home outside the U.S. may file the same Form 4868 for an automatic four-month extension to Oct. 15. However, interest becomes payable on any balance due as from June 15.
The taxpayer residing abroad may request a discretionary two-month extension from Oct. 15 to Dec. 15, provided he or she sends a letter to the IRS by Oct. 15 stating the reasons why additional time to file to Dec. 15 is needed.