Expat FAQ - Frequently Asked Questions
Whether you are new to the Expat life or a veteran Expat with many years of overseas experience the following information will serve you well in qualifying and maintaining the foreign earned income exclusion.
I have a civilian contractor ID or other type of military identification do I qualify for the combat zone tax exclusion?
No the only exclusion available to Expats working in a combat zone is the foreign earned income exclusion and this is earned by qualifying for the presence test or bona fide residence test. (See Combat Zone section for more information).
If I don’t make the one-year mark can we just prorate the number of days and exclude them from income if in a combat zone?
No you must qualify for the foreign presence test or bona fide residence test. There is no special IRS benefit for Expats working in combat zones. If you've made one year and don't make the second year contact us, you may have earned some exclusion.
My income was less than the $85,700 do I still have to file a return?
Yes every Expat must file a return to request the foreign earned income exclusion. To qualify for the exclusion the return must also be filed in timely manner or this may cause your election to be rejected.
My company did not issue a W-2 because they are a foreign affiliate or a foreign company do I have to report this and file a return?
Absolutely, if you are a US citizen with income from sources outside the United States (foreign income), you must report all of that income on your tax return. This is true whether you reside inside or outside the United States and whether or not you receive a form 1099 statement from a foreign payor.
How can I determine if I have the right CPA?
As a CPA I suggest only using CPA’s. A CPA has to meet stringent college and post college training that allows them to receive and maintain a license. Anyone else can pretend to be an accountant or tax preparer. Ask them to provide referrals of clients that work with you. Ask your coworkers who they use. See if the price is reasonable. Too low or too high means they probably don’t do many overseas returns. Do not use CPA’s who will not meet with you or provide you with a physical address. If you have to explain what an Expat is to your preparer you should probably reconsider your choice.
Does my CPA need to be local?
No, in fact most CPA’s qualified to assist Expats will not be found in your hometown or state for that matter.
How do I go about filing without coming to your office?
At our firm we make filing as convenient as going to your local CPA. Via the web, email, fax and phone we gather all the necessary documentation to prepare an accurate and timely return. After reviewing the results via phone and email we then efile, mail or email the return back to the client for filing. We provide exceptional personal service to the Expat or their designate if necessary.
Should I use a franchise tax preparer?
This is a matter of choice and although they may appear to be convenient they will never be able to provide the high level of service a CPA can provide. In many cases franchise fees for similar services are higher with less value. Our firm alone amended and revised returns in the past which saved our Expat Clients over $200,000 plus that were previously prepared by franchises, imagine the tragedy of those who didn’t second guess their preparer. Note: this doesn’t imply that all CPA’s know how to handle Expat taxes. Only an Expat CPA knows how to best serve your tax needs.
What is the Foreign Earned Income Exclusion?
The foreign earned income exclusion is an exclusion that will reduce your foreign earned income if you meet a qualifying test. Such as the bona fide residence or physical presence test.
What are the maximum amounts of foreign income that can be excluded?
The annual income exclusions are:
- 2002 - 2005 - $80,000
- 2006 - $82,400
- 2007 - $85,700
How can I claim the Foreign Earned Income Exclusion?
You must have Foreign Earned Income; your Tax Home must be in a Foreign Country and meet one of the qualifying tests. There are two types of qualifying tests for Expats: The Physical Presence Test and the Bona Fide Residence Test. The most common test for Expats on contract assignments is the Physical Presence Test. The physical presence test simply put requires you to spend a full 330 days overseas during a twelve-month period and not be in the US for more than 35 days during that same twelve months. The Bona Fide residence test is a little more restrictive. Your intent must be to work overseas indefinitely and make your permanent tax home and quarters in a foreign location. Questions of bona fide residence are determined according to each individual case; therefore you should consult an Expat CPA to see if you qualify.
Can I pro-rate my exclusion?
Yes if you start in the middle of a year you can request an extension to file so that you can file only after you meet the qualifying test. Then you prorate the exclusion backwards and forwards to offset income you earned in the two periods.
What Extensions are available to Expats?
If an Expat is overseas on April 15th you will receive an automatic two-month extension but you must make a statement to the IRS when you file and you should pay any estimated taxes by April 15th to avoid penalty and interest. If this is your first year working overseas there is a special extension that allows you to file 30 days after you meet your presence test. All the normal extensions are also available to Expats.
I haven’t filed for previous years that I worked overseas can I still file?
You can and you need to. If for some reason you are audited later on and the IRS catches the fact that you did not file they may not allow you to take the foreign earned income exclusion, even if you earned it, because it was not taken in a timely manner. This is rare but is still a possibility.
My last tax preparer treated me as Self-Employed and withheld SE Tax is this correct?
In most cases no. Unless you’re actually self-employed or an independent contractor working for yourself and not working directly for a contractor or another corporation then you may be self-employed. Usually you will receive a form 1099 that shows you were self employed or considered an independent contractor. If you’re not self-employed file an amended return immediately to get a refund. This is a common mistake among franchises and non Expat CPA’s. Keep in mind if you did receive a 1099 you may be able to deduct certain job related expenses to decrease your taxable income.
I have a lot of expenses such as cell phone, calling cards, gear, supplies, laptop and so on can I deduct these expenses?
Job related expenses can be deducted if you meet the criteria for itemizing instead of taking the standard deduction.
Can I deduct my storage fees while overseas?
Yes you can.
Can I take the same credits and deductions while working overseas that I would have taken if in the US?
In most cases the answer is yes. There is no difference in whether your working overseas or in the US.
I have out of pocket housing cost can I deduct these?
Yes you may be eligible for the housing deduction which will increase your foreign earned income exclusion. Certain qualified housing costs can be excluded and the housing must be in a foreign country.
I have a lot more questions and hear so many different things from others working overseas where can I find the correct answers for Expats?
There are so many scenarios, myths and half-truths of working overseas that you hear and encounter you could probable write a book about them. The place to find out the truth if you have several hours of free time is go to the IRS website and review the instructions and forms or take a short cut and contact us directly.
