Taxation of expatriates

Greetings,

I started working as an expatriat for the US government agency on February 1 this year. I was on vacation in the US for 21 days, including the flying time to and from the country. I realize that in order to claim the tax exemption on first $80,000 or so of the gross income I have to be outside of the US for at least 330 days. My question is, how this time is counted - from January till December, that is, during the tax year, or from the time I started my employment - in such a case, from February 1 this year till February 1 next year?

If the first rule is true, then it seems I won't be able to claim the tax relief, since I was home the whole month of January, even though I did not work at that time, as I was busy preparing for my departure, plus my vacation time, which overally exceeds 35 days.

If the second rule is true, it seems that I still may come home for another vacation to be eligible, as long as the total time in the US from February 1 till February 1 next year does not exceed 35 days.

My wife is working in the US while I'm overseas. Can we file a joint return and I can still be eligible for the tax relief?

How can I prove to the IRS, in case of an audit, that I really was out of the country for the required period of time? Entry/exit stamps in the passport? In this a case someone who has his passport stolen and replaced (such things unfortunately do happen) cannot claim the tax relief for that year?

Thanks in advance,

Alex

Reply to
Alex
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I hate to be a spoil sport, but the first sentence of your post indicates that you are not eligible for the exclusion. If you are an employee of the US government, the foreign earned income exclusion is not available to you. Only non-government people qualify. If you are an independent contractor, then you would be OK buy you would still owe self-employment tax on your earnings.

The rule on physical presence is that you must be physically present in one or more foreign countries for 335 days out of any 12-month period. Note that phrasing - any 12-month period. So, in your case, the maximum exclusion would be 11/12 of $86,400 for one year and 1/12 for the second year. You claim the exclusion on two tax returns.

The exclusion is individual, not joint, so you qualify even if your spouse does not.

Lanny K. Williams, CPA Nawarat, Williams & Co., Ltd. Income Tax Services for Expatriate Americans

Reply to
L K Williams

Alex, be sure you have checked into your state income tax status as well. Not all states conform to the foreign earned income exclusion, and depending on the laws of your state, you may continue to be taxed as a resident during your absence. In addition, if your domicile is in a community property state, your wife (who remains a resident) may be subject to tax on her community 1/2 of your foreign earnings.

You may already have determined your state tax status, but I brought it up just in case.

Katie in San Diego

Reply to
Katie

Can you claim the exclusion if you expect to be away for 335 days? I currently live in the US but expect to move to another country around September 1, and don't expect to be spending 30 days/yr in the US.

When I file my 2008 taxes, can I claim the exclusion for 4/12 of 2008 even though I haven't been out of the country for 330 days yet?

R's, John

Reply to
John Levine

No, you cannot claim the exclusion based on expectation. If you file your return, claiming the exclusion before you qualify, IRS will disallow the exclusion and assess the additional tax. You can request an extension good until 30 days after you expect to qualify or file your return without the exclusion and then amend it when you do.

Lanny K. Williams, CPA Nawarat, Williams & Co., Ltd. Income Tax Services for Expatriate Americans

Reply to
L K Williams

Katie, I live in Texas where there's no state income tax. I did not quite understand what did you mean under "community property state" - perhaps "community property estate"? We live in the rented apartment, my wife keeps paying the rent, so I don't expect any problems in that direction. I only wish someone would answer my original question. Several people in our team in Baghdad (that's where we're located) are also first-time expats like myself and are waiting for some guidance in this respect. I hope that Mr. L.K. Williams or someone else who is qualified and knowledgeable in this field will find time to answer my original question.

Alex Baghdad, Iraq

Reply to
Alex

I thought I had answered the question.

But, since my answer was not understood, I'll try again.

Again, i'll repeat my warning that you are not eligible for the exclusion if you are employed by the US government. If you work for a private contractor, under contract to the government, you can claim the exclusion.

The physical presence rule, which is what you are asking about, says that you must be "physically present" in one or more foreign countries for a period of 335 days during " any twelve-month period." Generally, this would begin on the day after you leave the US and end one year later. So, if you went overseas on February 1, the 12-month period begins on February 2 and ends on February 1 of the following year. Spend 335 days outside the US (this does not have to be in just one country) and you meet this requirement.

If you meet the requirements above, your maximum exclusion is pro-rated between the two years. You can claim up to 11/12 of the maximum in the first year. Remember, it is the maximum allowable exclusion that is allocated, not the actual earnings. So, if you earn less than about $79,000 (the actual amount would depend on the exact dates) you would still be able to exclude 100%.

In the second year, you would not have to use the same 12-month period, so the computations would be different.

Does this make it clear?

Lanny K. Williams, CPA Nawarat, Williams & Co., Ltd. Income Tax Services for Expatriate Americans

Reply to
L K Williams

Alex, under the laws of most states, each spouse's income and property belong to that spouse, subject to certain rights on the death of a spouse or dissolution of the marriage. These are separate property states. By contrast, 9 states (including Texas) treat property received by either spouse during the marriage as property of the marital community, Property acquired during the marriage with community funds is community property.

Since you are domiciled in Texas, a community property state, in the absence of a prenuptial agreement to the contrary, all of your current earnings belong 1/2 to you and 1/2 to your wife, and vice versa. In addition, income from property accumulated during your marriage is community income, and I believe under Texas law, income from separate property (e.g., property either spouse owned before the marriage that has not been commingled with marital property, or property received by one spouse by gift or inheritance and not commingled) is also community income.

However, since Texas has no individual income tax, you have nothing to worry about with respect to state taxes. The community property rules would affect you, however, if you and your spouse were to file separate federal income tax returns, or if (perish the thought) your marriage were dissolved.

Katie in San Diego

Reply to
Katie

Mr. Williams,

Yes, now it's clear. Thank you very much! It seems that your previous reply did not arrive to my newsgroup server. Do you or any of your affiliates have an office in Houston?

Reply to
Alex

Thanks for your reply, Katie!

Reply to
Alex

If he's out of the country for all of 2009 as well, does get get to claim only 1/12 or 100% of the 2009 annual exclusion?

Reply to
removeps-groups

2009 is a separate year. What happens then depends on the facts for that year. You do not use the 2008 calculation to figure the tax in 2009. For 2009, he either qualifies as a bona fide resident or uses a new 12-month period.

Lanny K. Williams, CPA Nawarat, Williams & Co., Ltd. Income Tax Services for Expatriate Americans

Reply to
L K Williams

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