Income Tax Laws for Expats

Since the U.S. doesn’t have a “tax treaty” with most Latin countries (not necessary as taxes there are often handled differently), it is much easier than being in Europe, etc. U.S. Expats who meet the “Physical Presence Test” or the “Bona Fide Resident Test” may be able to utilize the “Foreign Earned Income Exclusion” and or the “Foreign Housing Exclusion”. The excluded income amount is adjusted each year (2006=$82,4k; 2007=$85,7k; 2008=$86,6k; etc.), using an inflationary formula. The “Bona Fide Resident Test” is actually rather strict, though few people assume this. This makes it one of the targets for audits (in 2001 I met someone who had handled these and she claimed at least one third of all people she ran into in C.A. who were claiming this did not qualify for it). Many people -perhaps quite honestly- claim it when they are not entitled to it. The primary question, with emphasis on “BONA FIDE”, “RESIDENT”, and “ENTIRE” is, “Were you a bone fide resident of a foreign country or countries for a period that includes the entire tax year?”. Many people claiming resident status are not residents or, even if they are, they often fail the time requirement (there are waivers on this, but personal circumstances don’t usually count and this is reserved for government work, civil unrest, war, etc. – and every Spring the IRS publishes a list of countries that quality due to adverse circumstances). Going somewhere for a year or more doesn’t make it your bona fide residence.

The second test is the “Physical Presence Test”. The tax form for foreign income exclusion includes a detailed chart of what days you were inside the U.S. The $86,6k exclusion presupposes you spent all 366 days outside the U.S., and all income derives from there (though you need a minimum of 330 days outside the U.S.); if you spent less than 366 days, then a formula comes into play and the exclusion amount decreases proportionately. Returning to the U.S. for any personal emergency/reason still counts toward the days not spent abroad. Due to past abuse, travel days spent in international waters or overnight in U.S. airport hubs on non-U.S. destination travel counts as U.S.-spent days, too. The monies above your exclusion amount are not your tax bracket, as is commonly done – and commonly audited (if you make $106,6k, then your tax bracket isn’t tied to the $20k difference, the amount above the exclusion, but $106,6k which is applied and paid on $20k – if that makes sense).

If your income was coupled with gratis housing, then that brings added concerns and complications – and there are special forms for determining this. Also included as earned income are pay differentials, overseas stipends, family allowances, educational equivalences, etc. Once you file excluded income, that exclusion remains in place until you revoke it, in writing. The June 15th due date is only if you qualify for “Automatic Extension-2” (I believe) – and there are requirements to this, so it is not as “automatic” as it might sound. There is also a 6-month automatic extension. But, these extend your time to file, not your time to pay (so interest comes into play on the unpaid tax amount). For income abroad, unless things just changed, the file date is an option depending on circumstances: April 15th if you are claiming a calendar-year tax, or 3 months and 15 days after the close of your fiscal year. If you make a good, comparable U.S.-based salary in C.A., it is sometimes in your interest to have a knowledgeable person due your taxes that first year, so you see how it is handled.