Q: This is my first year abroad and I have been away since April 2009. I was a resident of Oregon in the beginning of 2008 then California as of May 2008. What do i need to do/know to file taxes? Do I automatically get the extension for filing or do i need to file by April 15th since its my first year?
A: From your email it looks like you will need to file Part Year Resident returns in both states. It would depend on income generated in each state, if any, etc.
All US citizens are required to report their worldwide income to the IRS on their tax return. The two primary forms required for expat returns, in addition to the usual Form 1040, etc., are Form 2555 (PDF) – Foreign Earned Income Exclusion (instructions) and Form 1116 (PDF) – Foreign Tax Credit (instructions).
Yes, you get automatic a 2 month extension until June 15th. However, if you want to extend until October you will need to file for extension by April 15th. Make sure to check with each state to see if they accept the federal extension or whether you need to file an extension with the state as well. Filing an extension is never a bad idea for expats—gives you time to decide what you are going to do.
Q: I am a US expat living abroad and I was wrongly informed that I did not need to file a return if I didn’t earn more than a certain amount per year and lived outside the US as there is an exclusion. This was some years ago, I cannot recall the last year I filed a return and I am now very worried as I have recently been informed that I may have been required to fill in a form each year. I don’t know where to begin now.
I don’t know how to find out when my last return was filed and do I need to file a return for all the years I haven’t filed? What forms do I need? Can I file forms retroactively? Should I contact the IRS for help or should I file all years before contacting them?
A: You can look at your situation on the bright side: at least you are getting back into compliance when you are under no pressure! You never know if it might have come back to haunt you at a time when you could least afford it.
Your situation is not as bad as it appears. Regardless of when you last filed, what you need to do is file the most recent three years. This is what we always recommend to our clients. Technically, the IRS requires six years, but the unspoken rule is three. Then, if the IRS requests additional years the taxpayer can provide them.
Your tax return will use the same forms you would have used if you had been in the US with the addition of two forms that are specific to most expatriates: Form 2555 (PDF) – Foreign Earned Income Exclusion (instructions) and Form 1116 (PDF) – Foreign Tax Credit (instructions). The way the tax system works in the US is that a taxpayer must declare all income regardless location.
For information about basic expat tax filing requirements – as well as income exclusions, housing deductions and foreign tax credits available to US expats – please visit our Expat Tax Basics page.
Q: I’m an American citizen considering a 3 month contract with a Japanese company. I would be working in Japan and they would pay me as a contractor, not an employee. Right now I’m a sole proprietor.
Would it be better for tax purposes to incorporate (LLC or S Corp)? Would I pay any taxes in Japan? We’re also discussing a longer term contract where I would be in Japan for 270 days per year. Would I be better off as an employee or a contractor?
A: The short answer is an LLC or S Corp would pass through just like a sole proprietorship. Unless you would be making large sums it would not really be worth it, from a basic tax perspective. There may be legal or industry specific issues which make them attractive options.
The employee or contractor question is a tricky one. The big difference is whether you pay into US Social Security or into the Japanese system. Employees of foreign corporations are generally not required to pay into US system because they are paying into the foreign system. Those self-employed would be required to pay into the US system. Both statuses are eligible for the Foreign Earned Income Exclusion, for which you must meet the Physical Presence Test to qualify. However, self-employed taxpayers must pay Self-Employment Tax. This is comprised of the employee and employer portions of Social Security and Medicare. These taxes are not eligible to be excluded. It is possible to have all of your foreign income excluded and still have to pay Self-Employment Tax. We invite you to visit the Expat Tax Basics page on our main site for more information.
Tax returns for those filing as self-employed can be more complex– something to take into consideration.
Q: My family and I are now living in Denmark. We moved to Denmark from New Jersey back in January 2009. I have been looking on the Internet for answers to some tax questions and the IRS web site was not much help. I have a few basic questions to start.
#1 – I was told by others, friends of mine (I have not seen this in writing) that after I am living and working out of the country for 9 consecutive months, I fall into a tax-free status. What do they mean by this, and is this a true statement?
#2 – Even though I am living and working here in Denmark, my employer is is in the states and my salary is being paid (deposited) into my local checking account in New Jersey. Does this effect my tax-free status? My salary is not being paid by a foreign employer, does that make any difference tax wise?
#3 – If any of the above is true and correct, do I continue to pay (have my federal income tax) deducted from my salary and then file for a refund? Or, do I file a new W-4 claiming that I am tax exempt? This one really scares me because I was in India for four years working for the US government and I did this while I was there and I had a very hard time convincing the IRS that I paid income taxes in India for the last 4 years and that I did not have to pay both. They (the IRS) wanted back taxes for the 4 years that I did not pay (2000 to 2004). This took me well over a year to get that all sorted out.
My employer is deducting my Social Security and Medicare taxes every other week. I’m listed as a New Jersey resident so I do not deduct or have to pay any state income tax. I pay no taxes here in Denmark at all.
A: I will answer your questions in the order you sent them.
1. The information you received from your friends is completely untrue. All US citizens are required to report their worldwide income each year. That does not mean you will owe tax, depending on your circumstances, but there is no “tax free” status just because you are out of the US. Please visit our Expat Tax Basics page on our main site for more information.
2. The fact that you have a US employer would not matter because you are required to report your worldwide income. The next question is –do you have a state filing obligation? The answer to this can be more complex than the federal rules.
3. Without further information I would say that leaving it as it is would be the most simple and most conservative. Depending on all details of your return I can see a situation where you might want to file IRS Form 673(PDF). This allows your employer to stop withhold federal income tax (does not apply to SS or Medicare).
Q: I’m moving to Portugal for up to four years beginning in May of this year. I’m looking for some assistance with my tax return and an estimate of what I’ll need to set aside for my U.S. taxes each year.
A: There are a couple of issues up front that you should consider.
First, if you want to claim the Foreign Earned Income Exclusion, you will need to meet the Physical Presence Test. This means being outside the US 330 out of 365 day period. Most expats tend to file extensions in their first year so that they can be eligible for the exclusion. Please visit our Expat Tax Basics page on our main site for more information.
Second, you are basically required to pay into a social security system. The US has Totalization Agreements with countries to ensure that you are not having to pay into two systems, but you must pay into one.
Third, we recommend that you contact an Portuguese tax expert as well. We use the information from Portuguese tax returns to calculate for tax paid. You can also find more information on taxation by country in the Foreign Tax: Country-Specific Sites section of our Self-Help Links page on our main site.
Q: I am an American living abroad. My family has supported me for years, and have paid all of the taxes on the money they have given me. It is my understanding that due to this, I am their dependent, and do not owe additional taxes on that money. In 2009 I earned the equivalent of $3,200 US. Do I need to file a return on this amount? Or is it too small? How does it work with the money I have received from my family? Do I actually owe taxes on that as well, or is the fact that they have paid all taxes on it to date sufficient?
A: When your income is below the minimum filing amount you are not required to file a tax return. And, you are correct – you don’t have to declare gifts from your family. The minimum filing amount for 2009 is $5,700. However, if you have unearned income, interests, or dividends totalling more than $950 you would need to file.
The IRS has a page with further information.