Publication 54 |
2001 Tax Year |
Questions & Answers
This section answers tax-related questions commonly asked by
taxpayers living abroad.
Filing Requirements--Where, When, and How
1) When are U.S. income tax returns due?
Generally, for calendar year taxpayers, U.S. income tax returns are
due on April 15. If you are a U.S. citizen or resident and both your
tax home and your abode are outside the United States and Puerto Rico
on the regular due date, an automatic extension is granted to June 15
for filing the return. Interest will be charged on any tax due, as
shown on the return, from April 15.
2) Where do I file my U.S. income tax return?
If you claim the foreign earned income exclusion, the foreign
housing exclusion, the foreign housing deduction, or an exclusion of
income for bona fide residents of American Samoa, you should file your
return with the:
Internal Revenue Service
Center |
Philadelphia, PA
19255-0215. |
If you are not claiming one of the exclusions or the deduction, but
are living in a foreign country or U.S. possession and have no legal
residence or principal place of business in the United States, you
should send your return to the address shown above.
If you are not sure of the place of your legal residence and have
no principal place of business in the United States, you also can file
with the Philadelphia Service Center. However, you should not file
with the Philadelphia Service Center if you are a bona fide resident
of the Virgin Islands or a resident of Guam or the Commonwealth of the
Northern Mariana Islands on the last day of your tax year. See the
discussion in chapter 1.
3) I am going abroad this year and expect to qualify for the
foreign earned income exclusion. How can I secure an extension of time
to file my return, when should I file my return, and what forms are
required?
a) You should file Form 2350 by the due date of your return to
request an extension of time to file. Form 2350 is a special form for
those U.S. citizens or residents abroad who expect to qualify under
either the bona fide residence test or physical presence test and
would like to have an extension of time to delay filing until after
they have qualified.
b) If the extension is granted, you should file your return after
you qualify, but by the approved extension date.
c) You must file your Form 1040 with Form 2555 (or Form
2555-EZ).
4) My entire income qualifies for the foreign earned income
exclusion. Must I file a tax return?
Generally. Every U.S. citizen or resident must file a U.S. income
tax return unless total income without regard to the foreign earned
income exclusion is below an amount based on filing status. The income
levels for filing purposes are discussed under Filing
Requirements in chapter 1.
5) I was sent abroad by my company in November of last year. I
plan to secure an extension of time on Form 2350 to file my tax return
for last year because I expect to qualify for the foreign earned
income exclusion under the physical presence test. However, if my
company recalls me to the United States before the end of the
qualifying period and I find I will not qualify for the exclusion, how
and when should I file my return?
If your regular filing date has passed, you should file a return,
Form 1040, as soon as possible for last year. Include a statement with
this return noting that you have returned to the United States and
will not qualify for the foreign earned income exclusion. You must
report your worldwide income on the return. If you paid a foreign tax
on the income earned abroad, you may be able to either deduct this tax
or claim it as a credit against your U.S. income tax.
However, if you pay the tax due after the regular due date,
interest will be charged from the regular due date until the date the
tax is paid.
6) I am a U.S. citizen and have no taxable income from the
United States, but I have substantial income from a foreign source. Am
I required to file a U.S. income tax return?
Yes. All U.S. citizens and resident aliens, depending on the amount
of the foreign source income, are subject to U.S. tax on their
worldwide income. If you paid taxes to a foreign government on income
from sources outside the United States, you may receive a foreign tax
credit against your U.S. income tax liability for the foreign taxes
paid. Form 1116 is used to figure the allowable credit.
7) I am a U.S. citizen who has retired, and I expect to remain
in a foreign country. Do I have any further U.S. tax obligations?
Your U.S. tax obligation on your income is the same as that of a
retired person living in the United States. (See the discussion in
chapter 1 of this publication for filing requirements.)
8) I have been a bona fide resident of a foreign country for
over 5 years. Is it necessary for me to pay estimated tax?
U.S. taxpayers overseas have the same requirements for paying
estimated tax as those in the United States. See the discussion under
Estimated Tax in chapter 1.
Overseas taxpayers should not include in their estimated income any
income they receive that is, or will be, exempt from U.S. taxation.
Overseas taxpayers can deduct their estimated housing deduction in
figuring their estimated tax.
The first installment of estimated tax is due on April 15 of the
year for which the tax is paid.
9) Will a check payable in foreign currency be acceptable in
payment of my U.S. tax?
Generally, only U.S. currency is acceptable for payment of income
tax. However, if you are a Fulbright grantee, see the discussion under
Fulbright grants in chapter 1.
10) I have met the test for physical presence in a foreign
country and am filing returns for 2 years. Must I file a separate Form
2555 (or Form 2555-EZ)
with each return?
Yes. A Form 2555 (or Form 2555-EZ) must be filed with each
Form 1040 tax return on which the benefits of income earned abroad are
claimed.
11) Does a Form 2555 (or 2555-EZ) with a Schedule C or
Form W-2 attached constitute a return?
No. The Form 2555 (or 2555-EZ), Schedule C, and Form
W-2 are merely attachments and do not relieve you of the
requirement to file a Form 1040 to show the sources of income reported
and the exclusions or deductions claimed.
12) On Form 2350, Application for Extension of Time to File U.S.
Income Tax Return, I stated that I would qualify under the physical
presence test. If I qualify under the bona fide residence test, can I
file my return on that basis?
Yes. You can claim the foreign earned income exclusion and the
foreign housing exclusion or deduction under either test as long as
you meet the qualification requirements. You are not bound by the test
indicated in the application for extension of time. You must be sure,
however, that you file the Form 1040 return by the date approved on
Form 2350, since a return filed after that date may be subject to a
failure to file penalty.
If you will not qualify under the bona fide residence test until a
date later than the extension granted under the physical presence
rule, apply for a new extension to a date 30 days beyond the date you
expect to qualify as a bona fide resident.
13) I am a U.S. citizen who worked in the United States for 6
months last year. I accepted employment overseas in July of last year
and expect to qualify for the foreign earned income exclusion. Should
I file a return and pay tax on the income earned in the United States
during the first 6 months and then, when I qualify, file another
return covering the last 6 months of the year?
No. You have the choice of one of the following two methods of
filing your return:
a) You can file your return when due under the regular filing
rules, report all your income without excluding your foreign earned
income, and pay the tax due. After you have qualified for the
exclusion, you can file an amended return,
Form 1040X, accompanied by Form 2555
(or 2555-EZ), for a refund of any excess tax paid.
b) You can postpone the filing of your tax return by applying on
Form 2350 for an extension of time to file to a date 30 days beyond
the date you expect to qualify under either the bona fide residence
test or the physical presence test, then file your return reflecting
the exclusion of foreign earned income. This allows you to file only
once and saves you from paying the tax and waiting for a refund.
However, interest is charged on any tax due on the postponed tax
return, but interest is not paid on refunds paid within 45 days after
the return is filed. (If you have moving expenses that are for
services performed in two years, you can be granted an extension to 90
days beyond the close of the year following the year of first arrival
in the foreign country.)
14) I am a U.S. citizen. I have lived abroad for a number of
years and have only recently realized that I should have been filing
U.S. income tax returns. How do I correct this oversight in not having
filed returns for these years?
File the late returns as soon as possible, stating your reason for
filing late. For advice on filing the returns, you should contact
either the Internal Revenue Service representative serving your area
or the Internal Revenue official who travels through your area
(details can be obtained from your nearest U.S. consulate or Embassy).
You can also write to the Internal Revenue Service, International
Section, P.O. Box 920, Bensalem, PA 19020-8518.
15) In 1996 I qualified to exclude my foreign earned income, but
I did not claim this exclusion on the return I filed in 1997. I paid
all outstanding taxes with the return. Can I file a claim for refund
now?
It is too late to claim this refund since a claim for refund must
be filed within 3 years from the date the return was filed or 2 years
from the date the tax was paid, whichever is later. A return filed
before the due date is considered filed on the due date.
Meeting the Requirements
of Either the Bona Fide
Residence Test or the
Physical Presence Test
1) I recently came to Country X to work for the Orange Tractor
Co. and I expect to be here for 5 or 6 years. I understand that upon
the completion of 1 full year I will qualify under the bona fide
residence test. Is this correct?
Not necessarily. The law provides that to qualify under this test
for the foreign earned income exclusion, the foreign housing
exclusion, or the foreign housing deduction, a person must be a
"bona fide resident of a foreign country or countries for an
uninterrupted period that includes an entire taxable year."
If, like most U.S. citizens, you file your return on a calendar
year basis, the taxable year referred to in the law would be from
January 1 to December 31 of any particular year. Unless you
established residence in Country X on January 1, it would be more than
1 year before you could qualify as a bona fide resident of a foreign
country. Once you have completed your qualifying period, however, you
are entitled to exclude the income or to claim the housing exclusion
or deduction from the date you established bona fide residence.
2) I understand the physical presence test to be simply a matter
of being physically present in a foreign country for at least 330 days
within 12 consecutive months; but what are the criteria of the bona
fide residence test?
To be a bona fide resident of a foreign country, you must show that
you entered a foreign country intending to remain there for an
indefinite or prolonged period and, to that end, you are making your
home in that country. Consideration is given to the type of quarters
occupied, whether your family went with you, the type of visa, the
employment agreement, and any other factor pertinent to show whether
your stay in the foreign country is indefinite or prolonged.
To claim the foreign earned income exclusion or foreign housing
exclusion or deduction under this test, the period of foreign
residence must include 1 full tax year (usually January
1--December 31), but once you meet this time requirement, you
figure the exclusions and the deduction from the date the residence
actually began.
3) To meet the qualification of "an uninterrupted period which
includes an entire taxable year" do I have to be physically present
in a foreign country for the entire year?
No. Uninterrupted refers to the bona fide residence proper and not
to the physical presence of the individual. During the period of bona
fide residence in a foreign country, even during the first full year,
you can leave the country for brief and temporary trips back to the
United States or elsewhere for vacation, or even for business. To
preserve your status as a bona fide resident of a foreign country, you
must have a clear intention of returning from those trips, without
unreasonable delay, to your foreign residence.
4) I am a U.S. citizen and during 2000 was a bona fide resident
of Country X. On January 15, 2001, I was notified that I was to be
assigned to Country Y. I was recalled to New York for 90 days
orientation and then went to Country Y, where I have been since.
Although I was not in Country X on January 1, I was a bona fide
resident of Country X and was in Country Y on December 31, 2001. My
family remained in Country X until completion of the orientation
period, and my household goods were shipped directly to my new post.
Can I qualify as a bona fide resident of a foreign country for 2001,
or must I wait for the entire year of 2002 to qualify?
Since you did not break your period of foreign residence, you would
continue to qualify as a bona fide resident for 2001.
5) Due to illness, I returned to the United States before I
completed my qualifying period to claim the foreign earned income
exclusion. Can I figure the exclusion for the period I resided
abroad?
No. You are not entitled to any exclusion of foreign earned income
since you did not complete your qualifying period under either the
bona fide residence test or physical presence test. If you paid
foreign tax on the income earned abroad, you may be able to claim that
tax as a deduction or as a credit against your U.S. tax.
6) Can a resident alien of the United States qualify for an
exclusion or deduction under the bona fide residence test or the
physical presence test?
Resident aliens of the United States can qualify for the foreign
earned income exclusion, the foreign housing exclusion, or the foreign
housing deduction if they meet the requirements of the physical
presence test. Certain resident aliens can qualify under the bona fide
residence test.
7) On August 13 of last year I left the United States and
arrived in Country Z to work for the Gordon Manufacturing Company. I
expected to be able to exclude my foreign earned income under the
physical presence test because I planned to be in Country Z for at
least 1 year. However, I was reassigned back to the United States and
left Country Z on July 1 of this year. Can I exclude any of my foreign
earned income?
No. You cannot exclude any of the income you earned in Country Z
because you were not in a foreign country for at least 330 full days
as required under the physical presence test.
Foreign Earned Income
1) I am an employee of the U.S. Government working abroad. Can
all or part of my government income earned abroad qualify for the
foreign earned income exclusion?
No. The foreign earned income exclusion applies to your foreign
earned income. Amounts paid by the United States or its agencies to
their employees are not treated, for this purpose, as foreign earned
income.
2) I qualify under the bona fide residence test. Does my foreign
earned income include my U.S. dividends and the interest I receive on
a foreign bank account?
No. The only income that is foreign earned income is income from
the performance of personal services abroad. Investment income is not
earned income. However, you must include it in gross income reported
on your Form 1040.
3) My company pays my foreign income tax on my foreign earnings.
Is this taxable compensation?
Yes. The amount is compensation for services performed. The tax
paid by your company should be reported on line 7 of Form 1040 and in
item 22(f) of Part IV, Form 2555 (or line 17 of Part IV, Form
2555-EZ).
4) I live in an apartment in a foreign city for which my
employer pays the rent. Should I include in my income the cost to my
employer ($1,200 a month) or the fair market value of equivalent
housing in the United States ($800 a month)?
No. You must include in income the fair market value (FMV) of the
facility provided, where it is provided. This will usually be the rent
your employer pays. Situations when the FMV is not included in income
are discussed in chapter 4 under Exclusion of meals and
lodging.
5) My U.S. employer pays my salary into my U.S. bank account. Is
this income considered earned in the United States or is it considered
foreign earned income?
If you performed the services to earn this salary outside the
United States, your salary is considered earned abroad. It does not
matter that you are paid by a U.S. employer or that your salary is
deposited in a U.S. bank account in the United States. The source of
salary, wages, commissions, and other personal service income is the
place where you perform the services.
6) What is considered a foreign country?
For the purposes of the foreign earned income exclusion and the
foreign housing exclusion or deduction, any territory under the
sovereignty of a country other than the United States is a foreign
country. Possessions of the United States are not treated as foreign
countries.
7) What is meant by the source of earned income?
The word "source" refers to the place where the work or
personal services that produce earned income are performed. In other
words, income received for work in a foreign country has its source in
that country. The foreign earned income exclusion and the foreign
housing exclusion or deduction are limited to earned income from
sources within foreign countries.
Foreign Earned
Income Exclusion
1) I qualify for the foreign earned income exclusion and earned
more than $78,000 during the year. Am I entitled to the maximum
$78,000 exclusion?
Not necessarily. Although you qualify for the foreign earned income
exclusion, you may not have met either the bona fide residence test or
the physical presence test for your entire tax year. If you did not
meet either of these tests for your entire tax year, you must prorate
the $78,000 maximum exclusion based on the number of days that you did
meet either test during the year.
2) How do I qualify for the foreign earned income exclusion?
To be eligible, you must have a tax home in a foreign country and
you must be a U.S. citizen or a resident alien who is a citizen or
national of a country with which the United States has an income tax
treaty in effect. You must be a bona fide resident of a foreign
country or countries for an uninterrupted period that includes an
entire tax year, or you must be a U.S. citizen or resident and be
physically present in a foreign country or countries for at least 330
full days during any period of 12 consecutive months.
Your tax home must be in the foreign country or countries
throughout your period of residence or presence. For this purpose,
your period of physical presence is the 330 full days during which you
are present in a foreign country, not the 12 consecutive months during
which those days occur.
3) Is it true that my foreign earned income exclusion cannot
exceed my foreign earned income?
Yes. The amount of the exclusion is limited each year to the amount
of your foreign earned income after reducing that income by the
foreign housing exclusion. The foreign earned income must be earned
during the part of the tax year that you have your tax home abroad and
meet either the bona fide residence test or the physical presence
test.
4) My wife and I are both employed, reside together, and file a
joint return. We meet the qualifications for claiming the foreign
earned income exclusion. Do we each figure a separate foreign earned
income exclusion and foreign housing exclusion?
You figure your foreign earned income exclusion separately since
you both have foreign earned income. The amount of the exclusion for
each of you cannot exceed your separate foreign earned incomes.
If you each have a housing amount, you can figure your housing
exclusion either separately or jointly. See the discussion,
Married Couples Living Apart, in chapter 4 for further
details.
Exemptions and
Dependency Allowances
1) I am a U.S. citizen married to a nonresident alien who has no
income from U.S. sources. Can I claim an exemption for my spouse on my
U.S. tax return?
Yes. You can claim an exemption for your nonresident alien spouse
on your tax return if your spouse has no income from sources within
the United States and is not the dependent of another U.S. taxpayer.
You must use the married filing separately column in the Tax Table
or the Tax Rate Schedule for married individuals filing a separate
return, unless you qualify as a head of household. (Also see Question
12 under General Tax Questions, later. )
A U.S. citizen or resident married to a nonresident alien also can
choose to treat the nonresident alien as a U.S. resident for all
federal income tax purposes. This allows you to file a joint return,
but also subjects the alien's worldwide income to U.S. income tax.
2) What exemptions can be claimed by a U.S. citizen for a
nonresident alien spouse who was blind and 65 years of age? The spouse
did not have income from U.S. sources and was not a dependent of
another U.S. taxpayer.
A U.S. taxpayer can generally claim one exemption for his or her
spouse. In addition, if the U.S. taxpayer does not itemize deductions
on Schedule A (Form 1040), the taxpayer may be entitled to a higher
standard deduction if his or her spouse is age 65 or older or is blind
at the end of the year.
3) I spend $375 a month to support my parents who live in Italy.
I am sure this provides the bulk of their support. Can I claim
exemptions for them?
It depends on whether they are U.S. citizens or residents. If your
parents are not U.S. citizens or residents, you cannot claim
exemptions for them even if you provide most of their support. To
qualify as a dependent, a person generally must be either a citizen or
national of the United States or a resident of the United States,
Canada, or Mexico for some part of the tax year. The other tests of
dependency also must be met.
4) Should I prorate my own personal exemption and the exemptions
for my spouse and dependents, since I expect to exclude part of my
income?
No. Do not prorate exemptions for yourself, your spouse, and your
dependents. Claim the full amount for each exemption permitted.
Social Security and
Railroad Retirement Benefits
1) Are U.S. social security benefits taxable?
Benefits received by U.S. citizens and resident aliens may be
taxable, depending on the total amount of income and the filing status
of the taxpayer. Under certain treaties, U.S. social security benefits
are exempt from U.S. tax if taxed by the country of residence.
Benefits similar to social security received from other countries
by U.S. citizens or residents may be taxable. (Refer to our tax
treaties with various countries for any benefit granted by the
treaty.)
2) As a U.S. citizen or resident, how do I figure the amount of
my U.S. social security benefits to include in gross income?
See Publication 915,
Social Security and Equivalent Railroad
Retirement Benefits, to figure if any of your benefits are
includible in income.
3) How are railroad retirement benefits taxed?
The part of a tier 1 railroad retirement benefit that is equivalent
to the social security benefit you would have been entitled to receive
if the railroad employee's work had been covered under the social
security system rather than the railroad retirement system is treated
the same as a social security benefit, discussed above.
The other part of a tier 1 benefit that is not considered a social
security equivalent benefit is treated like a private pension or
annuity, as are tier 2 railroad retirement benefits. Pensions and
annuities are explained in chapter 4 under Earned and Unearned
Income. Vested dual benefits and supplemental annuities are also
treated like private pensions but are fully taxable.
The proper amounts of the social security equivalent part of tier 1
benefits and any special guaranty benefits are shown on the Form
RRB-1099, Payments by the Railroad Retirement Board,
that you receive from the Railroad Retirement Board. The taxable
amounts of the non-social security equivalent part of tier 1, tier 2,
vested dual benefits, and supplemental annuities are shown on the
Form RRB-
1099-R, Annuities or Pensions by the Railroad Retirement
Board, that you receive from the Railroad Retirement Board.
Social Security Tax
and Self-Employment Tax
1) I am a minister with earned income from abroad and expect to
qualify for the foreign earned income exclusion. How do I pay my
self-employment tax?
File a Form 1040 with Schedule SE and
Form 2555. Figure your self-employment
tax on Schedule SE and enter it on Form 1040 as the tax due with the
return.
2) Because I expect to qualify for the foreign earned income
exclusion, I have requested and received an extension of time until
January 30, 2003, to file my 2001 return. However, since I will be
paying self-employment tax on my spouse's income, should I file a 2001
return when due, pay the self-employment tax, and then file another
return when I qualify for the exclusion?
No. You do not need to file a 2001 Form 1040 (the regular income
tax return) when due if you have received an extension. To stop
interest from accruing on the self-employment tax due for 2001, you
can pay enough estimated tax to cover the self-employment tax and any
income tax that would be due after taking out the amount of excludable
income.
Income Tax Withholding
1) How can I get my employer to stop withholding federal income
taxes from wages while I am overseas and eligible for the foreign
earned income exclusion?
File a statement in duplicate with your employer stating that
withholding should be reduced because you meet the bona fide residence
test or physical presence test. See also the following question.
2) Does the Internal Revenue Service provide forms to be used by
employees requesting employers to stop withholding income tax from
wages they expect to be excluded as income earned abroad?
Yes. Form 673
is a sample statement that can be used
by individuals who expect to qualify under the bona fide residence
test or the physical presence test. A copy of this form is displayed
in chapter 2. You can get this form by writing to the Internal
Revenue Service, International Section, P.O. Box 920, Bensalem, PA
19020-8518.
3) I am a U.S. citizen residing overseas, and I receive dividend
and interest income from U.S. sources from which tax is being withheld
at a rate of 30%. How can I have this situation corrected?
File Form W-9 (indicating that you are a U.S. citizen) with
the withholding agents who are paying you the dividends and interest.
This is their authority to stop withholding the 30% income tax at the
source on payments due you.
4) As a U.S. citizen receiving dividend and interest income from
the United States from which tax has been withheld, do I report the
net dividend and interest income on my return, or do I report the
gross amount and take credit for the tax withheld?
You must report the gross amount of the income received and take a
tax credit for the tax withheld. This is to your advantage since the
tax withheld is deducted in full from the tax due. It is also
advisable to attach a statement to your return explaining this tax
credit so there will be no question as to the amount of credit
allowable.
Deductions
1) Can I claim a foreign tax credit even though I do not itemize
deductions?
Yes. You can claim the foreign tax credit even though you do not
itemize deductions.
2) I had to pay customs duty on a few things I brought back with
me from Europe last summer. Can I include customs fees with my other
deductible taxes?
No. Customs duties, like federal excise taxes, are not deductible.
3) Some taxes paid in the United States are not deductible if I
itemize my deductions. Which ones are they?
Sales taxes, as well as the state and local taxes levied
specifically on cigarettes, tobacco, and alcoholic beverages are not
deductible. In addition, no deduction can be taken for drivers'
licenses or gasoline taxes. Auto registration fees cannot be deducted
except when they qualify as personal property taxes. To qualify as
personal property taxes they must be based on the value of the auto.
Some state and local taxes are deductible, such as those on
personal property, real estate, and income.
4) What types of foreign taxes are deductible?
Generally, real estate and foreign income taxes are deductible as
itemized deductions. Foreign income taxes are deductible only if you
do not claim the foreign tax credit. Foreign income taxes paid on
excluded income are not deductible as an itemized deduction.
Note. Foreign income taxes are usually claimed under the
credit provisions, if they apply, because this is more advantageous in
most cases.
5) I rented an apartment in the United Kingdom and had to pay a
local tax called a "general rates" tax, which is based on
occupancy of the apartment. Can I deduct this tax as a foreign real
estate tax?
No. This tax does not qualify as a real estate tax since it is
levied on the occupant of the premises rather than on the owner of the
property.
Scholarship and Fellowship Grantees
1) I am a Fulbright grantee. What documentation must I attach to
my return?
a) There are no special tax forms for Fulbright grantees. File on a
regular Form 1040.
b) If you claim exemption as a scholarship or fellowship grantee,
submit brochures and correspondence describing the grant and your
duties.
c) If you are located in a foreign country and wish to pay tax in
foreign currency, you should submit a certified statement showing that
you were a Fulbright grantee and at least 70% of the grant was paid in
nonconvertible foreign currency (see Publication 520).
2) I taught and lectured abroad under taxable grants. What
expenses can I deduct?
You may be able to deduct your travel, meals, and lodging expenses
if you are temporarily absent from your regular place of
employment. For more information about deducting travel, meals, and
lodging expenses, get Publication 463.
3) I am a professor who is teaching abroad while on sabbatical
leave from my position in the United States. What records am I
required to keep to prove my expenses? How do I allocate my meals and
lodging if my wife and children live with me in an apartment and my
wife does the cooking?
Keep a day-to-day record of expenses, with receipts where possible.
Allocate meals by dividing the total expense by the number in your
family and take your proportionate share. Generally, your deduction
for rent will be limited to the amount you would have paid had you
been abroad alone.
General Tax Questions
1) Will the Internal Revenue Service representatives at the
Embassies
answer questions about tax
laws of our home state and the laws of the foreign country where we
reside as well as U.S. federal income tax laws?
No. The IRS representatives are authorized only to answer tax
questions on U.S. federal income tax. You should write your home
state's tax office for state tax information and contact the tax
officials of the country where you reside for information regarding
their taxes.
2) Can Internal Revenue Service personnel recommend tax
practitioners who prepare returns?
No. IRS employees are not permitted to recommend tax practitioners
who prepare income tax returns.
3) I just filed my return. How long will it take to get my
refund?
It may take up to 10 weeks to issue a refund on a return that is
properly made out. A refund may take longer than that if the return is
filed just before the filing deadline.
An error on the return will also delay the refund. Among the most
common causes of delay in receiving refunds are unsigned
returns and incorrect social security numbers.
4) I have not received my refund from last year's return. Can I
claim the credit against this year's tax?
No. That would cause problems to both years' returns. If your last
year's refund is overdue, write to the Internal Revenue Service Center
where you filed your return and ask about the status of the refund. Be
sure to include your social security number (or individual taxpayer
identification number) in the letter.
5) I forgot to include interest income when I filed my return
last week. What should I do?
To correct a mistake of this sort you should prepare Form 1040X.
Include the omitted interest income, refigure the tax, and send the
form as soon as possible along with any additional tax due to the
Internal Revenue Service Center where you filed your return. Form
1040X can be used to correct an individual Form 1040 income tax return
filed for any year for which the period of limitation has not expired
(usually 3 years after the due date of the return filed, or 2 years
after the tax was paid, whichever is later).
6) I am a U.S. citizen and, because I expect to qualify for the
foreign earned income exclusion, all my foreign income (which consists
solely of salary) will be exempt from U.S. tax. Do I get any tax
benefit from income tax I paid on this salary to a foreign country
during the tax year?
No. You cannot take either a tax credit or a tax deduction for
foreign income taxes paid on income that is exempt from U.S. tax
because of the foreign earned income exclusion.
7) I am a U.S. citizen stationed abroad. I made a personal loan
to a nonresident alien who later went bankrupt. Can I claim a bad debt
loss for this money?
Yes. The loss should be reported as a short-term capital loss on
Schedule D (Form 1040). You have the burden of proving the validity of
the loan, the subsequent bankruptcy, and the recovery or nonrecovery
from the loan.
8) With which countries does the United States have tax
treaties?
Table 6-1 lists those countries with which the
United States has income tax treaties.
9) I am a retired U.S. citizen living in Europe. My only income
is from U.S. sources on which I pay U.S. taxes. I am taxed on the same
income in the foreign country where I reside. How do I avoid double
taxation?
If you reside in a country that has an income tax treaty with the
United States, that country may allow a credit against the tax you owe
them for the U.S. tax paid on U.S. source income. Nontreaty countries,
depending on their laws, may give the same type of credit against the
tax you owe them for the U.S. tax paid on U.S. source income.
If double taxation exists and you cannot resolve the problem with
the tax authorities of the foreign country, you can contact the
Internal Revenue Service, International Section, P.O. Box 920,
Bensalem, PA 19020-8518.
10) My total income after claiming the foreign earned income and
housing exclusions consists of $5,000 taxable wages. Am I entitled to
claim the refundable earned income
credit?
No. If you claim the foreign earned income exclusion, the foreign
housing exclusion, or the foreign housing deduction, you cannot claim
the earned income credit.
11) Last May my employer transferred me to our office in Puerto
Rico. I understand that my salary earned in Puerto Rico is tax exempt.
Is this correct?
As long as your employer is not the U.S. Government, all income
from sources within Puerto Rico is exempt from U.S. tax if you are a
bona fide resident of Puerto Rico during the entire tax year. The
income you received from Puerto Rican sources the year you moved to
Puerto Rico is not exempt. The tax paid to Puerto Rico in
the year you moved to Puerto Rico can be claimed as a foreign tax
credit on Form 1116.
12) I am a U.S. citizen married to a nonresident alien. I
believe I qualify to use the head of household
tax rates. Can I use the
head of household tax rates?
Yes. Although your nonresident alien spouse cannot qualify you as a
head of household, you can qualify if (a) or (b) applies:
a) You paid more than half the cost of keeping up a home that was
the principal home for the whole year for your mother or father for
whom you can claim an exemption (your parent does not have to have
lived with you), or
b) You paid more than half the cost of keeping up the home in which
you lived and in which one of the following also lived for more than
half the year:
- Your unmarried child, grandchild, stepchild, foster child,
or adopted child. A foster child will qualify you for this status only
if you can claim an exemption for the child.
- Your married child, grandchild, stepchild, or adopted child
for whom you can claim an exemption, or for whom you could claim an
exemption except that you signed a statement allowing the noncustodial
parent to claim the exemption, or the noncustodial parent provides at
least $600 support and claims the exemption under a pre-1985
agreement.
- Any relative listed below for whom you can claim an
exemption.
Parent |
Father-in-law |
Grandparent |
Brother-in-law |
Brother |
Sister-in-law |
Half-brother |
Half-sister |
Sister |
Son-in-law |
Stepbrother |
Daughter-in-law, or |
Stepsister |
If related by blood: |
Stepmother |
--Uncle |
Stepfather |
--Aunt |
Mother-in-law |
--Nephew |
| --Niece |
If your spouse was a nonresident alien at any time during the year
and you do not choose to treat your nonresident spouse as a resident
alien, then you are treated as unmarried for head of household
purposes. You must have another qualifying relative and meet the other
tests to be eligible to file as head of household. You can use the
head of household column in the Tax Table or the head of household Tax
Rate Schedule.
It may be advantageous to choose to treat your nonresident alien
spouse as a U.S. resident and file a joint income tax return. Once you
make the choice, however, you must report the worldwide income of both
yourself and your spouse.
Penalties and Interest
1) Does the June 15 extended due date for filing my return
because both my tax home and my abode are outside the United States
and Puerto Rico on the regular due date relieve me from having to pay
interest on tax not paid by April 15?
No. An extension, whether an automatic extension or one requested
in writing, does not relieve you of the payment of interest on the tax
due as of April 15 following the year for which the return is filed.
The interest should be included in your payment.
2) If I wait to file my return until I qualify for the foreign
earned income exclusion, I will be charged interest on the U.S. tax I
will owe. To avoid being charged interest, can I file my return on
time, reporting only my taxable income, excluding my salary for
services abroad that will be exempt after I have met the
qualifications?
No. If you file a return before you qualify for the exclusion, you
must report all income, including all income for services performed
abroad, and pay tax on all of it. After you meet the qualifications,
you can file a claim for refund by excluding the income earned abroad.
If you defer the filing of your return, you can avoid interest on tax
due on your return to be filed by paying the tax you estimate you will
owe with your request for an extension of time to file on Form 2350,
or by
paying enough estimated tax to cover
any tax that you expect will be due on the return.
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