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Frequently Asked Questions

FILING REQUIREMENTS

Q: Must I file a tax return?

A: Depending on your filing status, you must file a tax return if your income from whatever source exceeds your filing status and exemption amount(s). In 2010 the Standard Deduction for married couples filing jointly is $11,400; for Singles, $5,700; for Heads of Household, $8,400; and for married couples filing separately, $5,700. The exemption amount is $3,650 per dependent.

Q: I already report my income to my foreign country of residence. The Foreign Earned Income Exclusion eliminates that income for U.S. tax purposes. So why should I report to IRS?

A: Because if you don't report your earnings - even though they are 100% excluded - the IRS can later deny you the exclusion and tax you on that income (even though the foreign country already taxed the income).

Q: I am married to a non-resident alien spouse. Should I file jointly or separately?

A: If you have taxable income stateside, you are usually better off filing jointly as the tax tables are more favorable and therefore lower your tax liability.

Q: How can I file jointly with a non-resident alien spouse?

A: You have to apply for a taxpayer identification number with Form W-9 available at the website of Internal Revenue Service: www.irs.gov. You will also need to obtain a notarized copy of your spouse's passport. The U.S. Consulate in your area provides this service.

FILING STATUS

Q: What is filing status?

A: Your filing status determines how much is your Standard Deduction, or the amount that can be deducted before Exemptions from Adjusted Gross Income. Filing status is explained above under Filing Requirements.

Q: But I am a non-resident alien with dividend income from the U.S. What is my filing status?

A: If you are unmarried, your filing status is Single, and you are entitled to an exemption of $3,650. But you are not entitled to a Standard Deduction.

FOREIGN EARNED INCOME EXCLUSION

Q: Do I have to file a tax return if my income is below the $91,500 Foreign Earned Income Exclusion?

A: IRS says you must file even though the exclusion exempts your income from taxation up to $91,500. Otherwise IRS will require you to file, deny you this exclusion and tax you on your earned income (even though you already paid taxes to the foreign country where you earned the income). Of course you must pass certain residency requirements to qualify for Form 2555.

Q: What do you mean residence requirements?

A: Your tax home must be in a foreign country for either 12 consecutive months or 330 full days. 

Q: Both my wife and I earn foreign salaries. Can we both qualify for the Foreign Earned Income Exclusion?

A: Yes. Each of you can exclude up to $91,500 in foreign earnings.

Q: I earn more than $91,500 in foreign source wages. Will I have to pay taxes on the extra income?

A: The Foreign Tax Credit can apply to these taxes. But occasionally this credit does not eliminate a tax liability. The tax form 1116 is complex with the result that foreign taxes paid or accrued are not always fully applied but rather unapplied balances are carried forward.

Q: Do you mean I will have to pay taxes to the IRS when Forms 2555 and 1116 are exhausted even though I have already been fully taxed by the foreign country where I reside?

A: Yes. The problem is more complicated now. TIPRA (Tax iIncrease Prevention and Reconciliation Act of 2005) increased the exclusion amount from $80,000 to $91,500. But it also requires foreign resident taxpayers to pay taxes at the income tax brackets that would apply had the taxpayer been taxed on the $91,500.

REPORTING REQUIREMENTS

Q: I understand that IRS requires U.S. citizens and residents to report world-wide income from whatever source. If I file jointly with my foreign spouse, must she/he also report world-wide income?

A: Yes.

Q: I am a non-resident alien residing in Europe where I earn a salary working for an automaker. I also have investment income from the United States. What is my tax reporting obligation?

A: You only have to report U.S. source income.

Q: Do I have to report this income if the income is less than the filing threshold for single persons?

A: Although the filing threshold is $9,350 ($5,700 + $3,650) for Singles, this threshold does not apply to non-resident aliens. Instead they are liable for 30% tax (or lower treaty rate) which is normally deducted at source.

Q: I understand that this 30% applies to certain types but not all types of income. Can you clarify?

A: The 30% withholding requirement applies to income that is fixed and determinable: compensation for personal services, dividends, interest, original issue discount, pensions and annuities, alimony, real property income, royalties. scholarships, grants, sales commissions, estate or trust income, partnership income, and prizes.

Q: Is there a category that 30% does not apply to?

A: Yes. Income that is effectively connected to a U.S. trade or business. This kind of income is taxed at ordinary income tax rates.

TAX FORMS

Q: What tax form should I use as a U.S. citizen filing abroad?

A: You can choose between Forms 1040, 1040-A and 1040-EZ, depending on your circumstances. 

Q: What form must a non-resident alien use for his tax return?

A: Form 1040-NR.

FOREIGN TAX CREDIT

Q: Isn't there a tax credit for taxes I pay to my foreign country of residence?

A: Yes. Form 1116 allows you to take a credit for those foreign taxes. But the form is very complex and does not necessarily allow 100% credit in the year foreign taxes are paid or accrued. Instead unallowed foreign taxes may be carried forward and applied to subsequent years, which may not be an advantage.

Q: Can I just use Form 1116 in place of Form 2555 (Foreign Earned Income Credit)?

A: Yes, you can. But be careful because you can end up paying more taxes.

TAX TREATIES

Q: What are the benefits of a tax treaty?

A: Tax treaties exist between many countries including the United States. Treaties are intended to protect taxpayers from double taxation by spelling out the kinds of income countries to treaties can tax as well as the rate of taxation. However circumstances can occur in which American expatriates are double taxed.

Q: What is an example of double taxation?

A: In circumstances where the Foreign Earned Income Exclusion is exceeded and the Foreign Tax Credit does not take of the slack, IRS ends up benefiting by taxing the excess income in spite of its already having been taxed abroad.