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 for and maintaining the foreign earned income exclusion.

Most common FAQ: How do I qualify for the foreign income exclusion?

Foreign Income Exclusion: If you meet certain requirements, as outlined by the IRS, you may qualify to exclude part of your overseas income from your taxable income.  For 2011, the maximum exclusion is $92,900.  To qualify for any exclusion, you must meet the Physical Presence Test or qualify as a Bona Fide Resident (discussed below).

Physical Presence Test: In order to qualify for the physical presence test (PPT), you must be present in a foreign country for at least 330 FULL days during 12 consecutive months.  Your foreign income exclusion is based on the amount of days in your PPT that fall into a particular tax year. 

Example 1: Calendar Year PPT

Your PPT runs January 1, 2011 – December 31, 2011, and within that time period, you are present in a foreign country for AT LEAST 330 full days, and spend no more than 35 full or partial days in the United States or any US territory. Your foreign income exclusion is calculated as follows:

365 overseas days/365 calendar year days = 1.0 (ratio for exclusion)

1.0 x $92,900 = $92,900 (your 2011 foreign income exclusion)

Example 2: Non-Calendar Year PPT

You go overseas in July, and your first full day overseas is July 5, 2011.  Your PPT runs July 5, 2011 – July 4, 2012, and within that time period, you are present in a foreign country for AT LEAST 330 full days, and spend no more than 35 full or partial days in the United States or any US territory. Your foreign income exclusion for 2011 is calculated as follows:

180 overseas days/365 calendar year days = 0.493 (ratio for exclusion)

0.493 x $92,900 = $45,800 (your 2011 foreign income exclusion) 

Common Misconception: “Prorated” Exclusion – The only way to receive any FEI exclusion under PPT is to be overseas for a full 12 months, and be present in a foreign country for a full 330 days during that time period.  “Busting” days, or having less than 330 full foreign days within a 12-month period, does not qualify a taxpayer for a “prorated” exclusion.

Bona Fide Residence Test: The bona fide residence test (BFR) is reviewed by the IRS on a case-by-case basis.  Generally, you must be able to prove that you are living as a resident of a foreign country: paying any local income taxes, living as a citizen off the local economy, etc.  US citizens working in the Middle East, particularly in the combat zones of Iraq and Afghanistan, generally do not qualify for BFR, and should instead use the Physical Presence Test in order to claim foreign income exclusion.

EOC R&R in the US – End of contract (EOC) R&R’s in the US count against your 35 days allowed in the US for the Physical Presence Test, if they fall within the twelve-month period you are using to calculate the Physical Presence Test. Any time spent in the US, for any reason, must be included in your Presence Test calculation.

Other Common FAQs:

How do I go about filing without coming to your office?
At our firm, we make filing more convenient than going to your local CPA. You can submit your information to us via email, fax, or traditional mail – whichever method is most convenient for you.  We will communicate with you by email and/or phone while we process your return.  Once complete, we will email a secure copy of your tax return with filing instructions to you for review.  If efiling is available for your tax return, we will efile your return for you at no additional charge.
My income was less than the current year exclusion amount. Do I still have to file a return?
Yes. Every Expat must file a return to request the foreign earned income exclusion.
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?
Yes. Any US citizen with income from sources outside the United States (foreign income) must report all of that income on a tax return. This is true whether you reside inside or outside the United States and whether or not you receive a W-2 or Form 1099 statement from your employer.
I have not filed for previous years that I worked overseas. Can I still file?
You can and you need to as soon as possible. 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.
My last tax preparer treated me as Self-Employed and withheld SE Tax. Is this correct?
In most cases no. If you are 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 and subject to the self-employment tax. Usually you will receive a Form 1099 that shows you were self employed or considered an independent contractor. If you are not self-employed, you should file an amended return immediately to get a refund. This is a common mistake among franchises and non Expat Tax Professionals. Keep in mind that 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, etc. 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.
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. However, some credits that phase-out over certain modified adjusted gross income (MAGI) levels will not be available because your foreign earned income is added back in determining your MAGI.
I have out-of-pocket housing costs. Can I deduct these?
You may be eligible for a foreign housing deduction, which will increase your foreign earned income exclusion. Certain qualified foreign housing costs can be excluded.
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 many scenarios, myths and half-truths about working overseas. The rumor mill seems to work overtime at overseas job sites. To get the truth about working overseas, you could go to the IRS website and spend your precious time researching it yourself. However, the best thing to do is to spend your time doing what you do best, and leave the tax research up to us, Palazzo & Company, LLC. Contact us directly anytime with your questions or concerns about the tax ramifications of working overseas. You can reach us by email at expat@palazzotax.com, or by phone at 866-272-9224.