Q&A: I’m a partner in two offshore companies — how do I file?

Posted by Don W on May 13, 2010 under Business Tax Issues

Q: Hello, I am a U.S. citizen living in Europe and I am a partner in 2 separate companies here, with 50% in one and between 30% and 50% in the other. I am very confused and have several questions.

  1. As I live full time abroad, I get a 2-month extension for filing until June 15th, correct?
  2. What forms do I need to include with my 1040? As I understand it, I need the 2555 and the 5471?
  3. As I am a partner and receive distribution of earnings rather than a salary, this does not qualify as foreign earned income so I cannot elect the foreign earned income exclusion, correct? So would I still need the 2555 form?
  4. Income taxes and SS are taken from my earnings here. Do I qualify for US tax credit?

A: I will answer your questions in the order you presented them.

  1. Yes, you an get automatic extension until June 15th.
  2. From what you have presented you will need at the very least Form 2555, Form 1116 and
  3. If you are receiving distributions — and NOT dividends — for work done then yes, it does qualify as Earned Income.  Additional details about your situation would help us to provide a more specific answer.
  4. Income taxes and Social Security are two different issues.  If you paid income tax you probably qualify for the Foreign Tax Credit (see number 1).  Social Security is governed by whether or not there is a Totalization Agreement with the country in which you are residing.  If there is, then, generally, you are only required to pay into one system.  But you must pay into one or the other.

Q&A: I don’t think I’m actually an expat. Do I need to file?

Posted by Don W on under Expatriate Taxes, First Time Filing as an Expat

Q: Hi, I’m American but I live in the Netherlands and am married to a Dutch citizen.  I am not an expat, as I’m on a highly skilled migrant visa and I work for a Dutch company, earning euros. I’ve been told that I need to file a tax return in the US– can you advise?

A: Because you are a US citizen living and working abroad, you are an expat.  Let me qualify that – by our definition you are an expat!

All US citizens are required to report their worldwide income each year.  You do have to file.

Based on what your question it looks like you will have to file Married Filing Separate instead of Married Filing Joint.  If your husband is a non-resident alien with no exposure to the US then you must file MFS.

There’s good news, though:  the IRS provides two tools to help reduce, or eliminate, double taxation.  The first is the Foreign Earned Income Exclusion, which if you qualify, allows you to exclude up to $91,500 for the 2010 tax year.  The second tool is the Foreign Tax Credit.  This, potentially, gives you a dollar-for-dollar credit against your US taxes for taxes paid to foreign country.

It is more complex than that and various factors can determine the outcome.  But, that is the gist of it.

Our web site has a great deal of information about expat filing requirements on our Expat Tax Basics page.

Q&A: I’ll be working in another country but paid by my company in the US– what do I need to know?

Posted by Don W on under Expatriate Taxes, Relocation and Taxes

Q: I would like some information regarding expatriate tax as related to my somewhat unique situation. My company is planning to send me to the Dominican Republic to work with our offshore partners. Here are the specifics of my situation:

  • I will be working in the Dominican Republic for 1-3 years
  • I will be paid by my company in the US
  • My company has not incorporated in the Dominican Republic
  • I will simply be working with companies in the DR but will be working for and getting paid by my company in the US.
  • I plan to travel to the US at least twice each year, probably around Christmas and the 4th of July.
  • What are my options? Thanks again in advance for any information you can provide.

The MOST important thing to remember is whether or not you will qualify for the Foreign Earned Income Exclusion. That is where the 330 day rule comes from.

All the time you return for meetings, vacation, medical emergencies, etc. count against it.  Are you going to be paying taxes in the Dominican Republic? If so, you will also be eligible for the Foreign Tax Credit.

You can also find a great deal of information on our Expat Tax Basics page on our main site.

Estate Matters: A Paper Trail – and Why You Should Have One

Posted by Don W on April 22, 2010 under Estate Tax and Planning, Tax Matters in the News

Though we don’t like to think about it, it remains a fact that anything can happen to anyone, at any time – but through a handful of small actions, you can make things easier for your close family and friends:  by making your important documents easier to find in an emergency.

Four years ago, my brother keeled over (a cardiac event, it was called) and over the course of the next three days, while he was unconscious, it was left to the neighbors to search through his home to find any Health Care Directives, Power of Attorney papers and – if worse came to worst – a will.  The closest neighbor reported to me by phone that all such documents were eventually found, but in three different rooms throughout the house.  It made them frantic.

To avoid such a scenario in your own life, consider taking a bit of time to assemble a paper trail – and share it with at least a few close, trusted neighbors, friends or relatives.  Make it easier for them to help you.

A recent article in the New York Times provides a practical approach to putting together your own paper trail.  It may come in handy some day!


Posted by Don W on March 17, 2010 under Expatriate Taxes, Foreign Bank Account Reporting (FBAR), Tax Matters in the News

The IRS has made yet another change to what’s known as FBAR– they have “temporarily suspended the requirement to file a Report of Foreign Bank and Financial Accounts for the 2009 and earlier calendar years, for people who are not U.S. citizens, residents or domestic entities”.

Announcement 2010-16 (PDF) temporarily suspends the requirement to file Form
TD F 90-22.1, also known as the FBAR, as the IRS tries to clear up the definition of “United States person.” In addition, the IRS issued Notice 2010-23 (PDF), which provides FBAR filing relief for some persons with signature authority and who own commingled funds.

. . . After receiving a significant number of public comments, the Treasury Department published proposed FBAR regulations to provide taxpayers with guidance on who is required to file FBARs due on June 30, 2010, and how to answer FBAR-related 2009 federal income tax return questions.

The IRS and the Treasury Department now believe it is appropriate to provide the following administrative relief: The requirement to file an FBAR due on June 30, 2010, is suspended for persons who are not U.S. citizens, U.S. residents, or domestic entities. Additionally, all persons may rely on the definition of “United States person” found in the July 2000 version of the FBAR instructions to determine if they have an FBAR filing obligation for the 2009 and earlier calendar years. The definition of “United States person” there is: (1) a citizen or resident of the United States, (2) a domestic partnership, (3) a domestic corporation, or (4) a domestic estate or trust.

This substitution of the definition of “United States person” applies only with respect to FBARs for the 2009 calendar year and to earlier calendar years.

All other requirements of the 2008 version of the FBAR form and instructions, as modified by Notice 2010-23, remain in effect until changed by subsequent guidance issued by the Treasury Department, including the IRS.

– excerpted from WebCPA – Feb 26, 2010

Q&A: It’s my first year abroad– how should I file back home, and how do I get an extension?

Posted by Don W on February 22, 2010 under Expatriate Taxes, First Time Filing as an Expat, Relocation and Taxes

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&A: I just found out that I should have been filing for years. Please help– where do I begin?

Posted by Don W on under Expatriate Taxes, First Time Filing as an Expat

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&A: Is it better to be a contractor or an employee of a foreign corporation, for tax purposes?

Posted by Don W on under Business Tax Issues, Expatriate Taxes

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&A: Is there such a thing as a “tax-free” status? My employer is in the US– does that make any difference tax-wise?

Posted by Don W on February 12, 2010 under Expatriate Taxes

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&A: I’m about to be an Expat. What are some of the basics I need to know?

Posted by Don W on under Expatriate Taxes, First Time Filing as an Expat

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.