| Pub. 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad |
2004 Tax Year |
Additional Material
This is archived information that pertains only to the 2004 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.
Questions and 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, and you are not making a payment, you should file your return with the:
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 as
an itemized deduction 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 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 be able to claim 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
on filing
requirements in chapter 1 of this publication.)
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 income is earned.
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 Fulbright Grant 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
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
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 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 1999, I qualified to exclude my foreign earned income, but I did not claim this exclusion on the return I filed in
2000. 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 which 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 2003 was a bona fide resident of Country X. On January 15, 2004, 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 Y on
January 1, I was a bona fide resident of Country X and was in Country Y on December 31, 2004. 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 2004,
or must I wait for the entire year of 2005 to qualify?
Since you did not break your period of foreign residence, you would continue to qualify as a bona fide resident for 2004.
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. Resident aliens who are citizens or nationals of a
country with which the
United States has an income tax treaty in effect can also 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 Form 1040, Part
IV, item 22(f) (or on
Form 2555-EZ, Part IV, line 17).
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)?
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 the source of earned income?
The source of earned income is the place where the work or personal services that produce the 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 $80,000 during the year. Am I entitled to the maximum
$80,000
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 $80,000
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 be a U.S. citizen or resident alien. You must be either
a bona fide resident of a
foreign country or countries for an uninterrupted period that includes an entire tax year, or you must be physically present
in a foreign country or
countries for at least 330 full days during any period of 12 consecutive months. U.S. citizens may qualify under either test.
The physical presence
test applies to all resident aliens, while the bona fide residence test applies to resident aliens who are citizens or nationals
of a country with
which the United States has an income tax treaty in effect.
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 Married Couples 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. If you file a joint return, you can claim an exemption for your nonresident alien spouse. If you do not file a joint
return, you can claim an
exemption for your nonresident alien spouse only 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 section C of the Tax Computation Worksheet, 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) I support my parents who live in Italy. I am sure that I provide 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.
3) 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,
2006, to file my 2004 return. However, since I will be paying self-employment tax on my spouse's income, should I file a 2004
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 2004 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 2004, 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 on the Internet at
www.irs.gov or 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.
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, Travel, Entertainment, Gift, and Car
Expenses.
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, contact the IRS and ask about
the status of the
refund. If you are outside the United States, call or write the nearest IRS office. (See Services Available Outside the United States in
chapter 7 for a list of phone numbers.) Otherwise, call or write your local U.S. IRS office. If you write to the IRS, 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, at the end of chapter 6, 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, the treaty will generally contain provisions
to eliminate double
taxation. Many treaties will provide reduced rates for various types of income. Treaties often provide reciprocal credits
in one country for the tax
paid to the other country. Nontreaty countries, depending on their laws, may give the same type of credit.
If double taxation with a treaty country exists and you cannot resolve the problem with the tax authorities of the foreign
country, you can contact
the U.S. competent authority for assistance. See chapter 6 for information on requesting consideration.
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
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. Can I qualify to 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 entire 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
|
Brother-in-law
|
| |
Grandparent
|
Sister-in-law
|
| |
Brother
|
Half-sister
|
| |
Half-brother
|
Son-in-law
|
| |
Sister
|
Daughter-in-law
|
| |
Stepbrother
|
|
| |
Stepsister
|
If related by blood:
|
| |
Stepmother
|
– Uncle
|
| |
Stepfather
|
– Aunt
|
| |
Mother-in-law
|
– Nephew
|
| |
Father-in-law
|
– 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 Section D of the Tax Computation Worksheet.
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.
For more information on head of household filing status, get Publication 501, Exemptions, Standard Deduction, and Filing Information.
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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