Larry's 2016 U.S. Tax Guide 'Supplement' for U.S. Expats, Green Card Holders and Non-Resident Aliens in User Friendly English. Laurence E. 'Larry'
to tell you: what if a couple of years from now you discover you have omitted something important from your prior tax filings and have absolutely no alternative than to go through the Offshore Voluntary Disclosure Program? Well the extortionists who run this program (think I am going too far in saying this? Read the Taxpayer Advocate’s 2015 report to Congress and tell me this in not extortion!) want 8 years of filings. That would mean tax years 2008 and subsequent. If you have good reason for it, then save whatever you wish to save from earlier years but I think you can safely junk most of that earlier-year stuff.
That’s it - these are the absolute basics.....according to me, at least......now let us get on to some specific details - at least the details I deem important for you to know. Bear in mind that this is ‘one man’s opinion’ and you should rely upon more than just this - even a cursory look at both tax forms and instructions really is becoming necessary.
First, how to become an expat for tax filing purposes…..
Scenario # 1: You are moving from the U.S. to some strange, exotic land
Let us suppose….You are reading this book for the first time, while you are still in the U.S. You are soon to embark on your trip overseas, to work for the first time outside of the U.S. Perhaps you are an experienced veteran of the work force, taking your specialty overseas for an international employer who has just signed you to a multi-year contract. Or perhaps you are a young professional going into the field of law or going to work for an investment banking house or perhaps you are a teacher, going to teach at an international school. Let’s use the latter occupation, teacher, as an example for this scenario because those young bankers or lawyers will not have much time off to put their initial, qualifying year for foreign earned income exclusion in jeopardy. You, the teacher, on the other hand, are more apt to screw yourself up because of a misunderstanding of the time you must be overseas during your first year overseas – a year that begins from the date of your arrival in your new place of residence through the next 365 days. For tax year 2015 – and that means ‘calendar year’ because the IRS operates on a calendar year reporting basis - you are entitled to a maximum of $US100,800 as foreign earned income exclusion. If you are married and your spouse is working overseas, too, then each of you would be entitled to exclude a maximum of $US100,800 from taxable income. You cannot transfer any excess, ‘unused’ exclusion from one spouse to another – if two of you each earn less than $US100,800 and it is all eligible for the exclusion, then you will still have to file a tax return but you will not owe any taxes. If either or both of you have more income than the exclusion + standard or itemized deductions + tax exemptions, you are going, in essence, to be taxed at the maximum rate – and that includes all income not eligible for foreign earned income exclusion.
Tax benefits for the U.S. expat are necessary. First, the costs of living a comparable life in Hong Kong or Dubai or Singapore are at stratospheric levels compared to, say, the cost of living in Iowa. Mind you, I have absolutely nothing against Iowa - I like the place – I spent time, two summers ago, living in Iowa City while taking writing classes at the University of Iowa (and no, I am not foolhardy to think that there ever can be a ‘tax literature’ genre!)! Yet costs of life are very, very different. The average salary in mid-levels, Hong Kong, where a concentration of international expats reside is over $US 200,000 and even with that salary, life is a struggle because of the highest real estate costs and rentals in the world. Secondly, without those benefits and with the singular distinctive obligation of the U.S. expat – we seem to be the ONLY expats with an annual filing obligation - my British, German, French and Australian friends don’t have to file tax returns - they do not even think about their income, their travels, their tax consequences. Their countries do not tax upon world-wide income, just the income taxed within their territory. Heck, there are no tax consequences for them as there are for us, the U.S. expat or green card holder. If tax laws became too draconian, there would be no Americans overseas to represent U.S. products, services and industry – I like my Australian and New Zealand friends but let’s face it – they simply cannot do as good a job as Americans when it comes to representing America overseas! For the U.S. to compete on an international level, it needs its own citizenry representing the U.S.!
Tax home
Your tax home is usually in the vicinity of where you work. It does not necessarily have to be your family home. Your family home might be in California. You maintain that residence and have intentions of returning there, years from now. Yet that family residence is halfway around the world and as you are not living there, it is not necessarily your tax home, anymore. O.K., you arrived from San Francisco to your new home in Hong Kong on 1 August 2015. Through 31 July 2015, your tax and family home was San Francisco. To meet the requirements for excluding either a portion or the total of 5/12 (1 August – 31 December 2014) of your non-U.S. earned income, you must qualify by meeting the physical presence test for 2015.
Let us get back to that U.S. teacher, as an example. He or she came to his/her new land on or about 1 August 2015 to begin work shortly thereafter. To qualify your August – December 2015 income tax excludable for your 2015 tax return you must meet the requirements of the physical presence test for your first year. (1 August 2015 – 31 July 2016). To put it simply, you CANNOT be in the U.S. for 35 days or more during that period of time. Less is best! If you go back home over the Xmas vacation, then you’d better start counting days if your school year ends in mid-June: if you exceed your 35 days maximum before 31 July 2016, then you will be taxed in full on your overseas income – now you do not want that to happen, do you? If you meet these rather strict requirements for the physical presence test during your first year of residency overseas, then you have a choice of either filing your tax return on time (15 April or, with automatic extension, 15 June), without being eligible for the exclusion and then filing an amended return, requesting a refund of what you earlier might have paid on your initial return when you file upon reaching eligibility. You want my advice? Unless you’ve got a very large withholding refund coming, then go on extension and file one return, as soon as possible, after you’ve reached ‘eligibility’. File for an additional extension before 15 June and then file only one return, as soon as you are formally eligible – it is a heck of a lot easier – trust me!!! Anyhow, Hong Kong teacher, file your return after 1 August 2016, with that return on extension....and it’ll be a veritable ‘piece of cake’ for you, now and into the future! Once you’ve met the physical presence test requirements for 2015, if you are overseas and working for 2016, then you are then more than likely to be eligible for bona fide residency classification – and this is both a heck of a lot easier to maintain and keep within limits of – and amazingly flexible for you – especially if you are a teacher not working but entitled to spend future entire summers back home in the U.S. without jeopardizing your ability to take advantage of the foreign earned income exclusion!
The Bona Fide Residence Test
This is the other, generally easier way to qualify for the foreign earned income exclusion. It is quite applicable to situations similar to Scenario # 2, below, and is, by and large, applicable to all long-term expats and green card holders. If you are a legitimate/bona fide resident of a foreign country (or countries) for an uninterrupted period that includes an entire year, then you are eligible to use the bona fide residence test to qualify. Let’s use our Hong Kong teacher as an example. Let’s assume that she or he followed the initial year guidelines to qualify for 2015 under the physical presence test, and that our friendly teacher is still at the job at the end of 2016. Well for tax year 2016, because of that ‘uninterrupted first year’, that teacher could go back to the states for the balance of the summer, come home again for Thanksgiving and then take the Christmas holidays back home in the States with his or her family and not worry one bit about exceeding the 35 days because the ONLY thing that matters under the bona fide residence test for tax year 2016 is that you are indeed a bona fide resident! If you can afford it, take those vacations – see the world! You are not violating the conditions of bona fide residency – once you attain it, you definitely do not want to lose it!
Scenario # 2: The expat who’s been overseas for years…….
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