Foreign earned income exclusion and W4 and Form 673

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Topic Author
cheesepep
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Foreign earned income exclusion and W4 and Form 673

Post by cheesepep »

I am a U.S. citizen who resides and works abroad and can qualify for the entire $91,400 foreign earned income exclusion.

I currently have 4 allowances on my W4 and pay about $550 in foreign income tax per month to the country I reside in.

According to some preliminary numbers from TurboTax, I will get a $16,000 refund check next time I file taxes in 2011 for the 2010 tax year.

I don't want to get any refund check (or at least a much smaller one).

I am suffering here because I pay a lot of U.S. income tax per paycheck and I also pay the $550 a month to the foreign government here. That is a lot of taxes.

However, when I left to go abroad, my employer did not require me to file a Form 673 form which I believe (please correct me if I am wrong) allows me to exclude most if not all of my income from US taxes?

My question is what should I do?

1) File a new W4 form and increase the number of allowances to 8 or something?
2) File a Form 673 form with my employer? (how will my employer know how to decrease my U.S. taxes?)
3) A combination of 1-2?

Many thanks here. I just don't want to get this huge refund at the end of the year and rather have it bit by bit every paycheck.

Furthermore, it is my understanding that Form 673 does not need to be submitted to the IRS by my employer, but I still need to fill out the foreign income exclusion form come tax time.
Michael B
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Post by Michael B »

From Pub 54: Tax Guide for U.S. Citizens and Resident Aliens Abroad
Foreign earned income exclusion. Your employer does not have to withhold U.S. income taxes from wages you earn abroad if it is reasonable to believe that you will exclude them from income under the foreign earned income exclusion or the foreign housing exclusion.

Statement. You can give a statement to your employer indicating that you expect to qualify for the foreign earned income exclusion under either the bona fide residence test or the physical presence test and indicating your estimated housing cost exclusion.

Form 673 is an acceptable statement. You can use Form 673 only if you are a U.S. citizen. You do not have to use the form. You can prepare your own statement. See a copy of Form 673, later.

Form 673

Generally, your employer can stop the withholding once you submit the statement that includes a declaration that the statement is made under penalties of perjury. However, if your employer has reason to believe that you will not qualify for either the foreign earned income or the foreign housing exclusion, your employer must continue to withhold.
So, yes, form 673 should do the trick and the W-4 should be no longer needed. Good luck
livesoft
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Post by livesoft »

Why not call up the people who pay you and ask them? You cannot be the only one in this predicament. What did they do for others like you?
Topic Author
cheesepep
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Post by cheesepep »

Thanks for the replies. I have another question.

I have looked at Form 673 and all I see is some exclusions for housing. According to Pub 54, if the exclusions for the foreign income tax ($91,400 for me) is greater than the housing, then I would qualify for the $91,400 and that is what my employer will exclude from my paychecks? I guess I would leave that section blank and the $91,400 would still be excluded from my paychecks?

To livesoft, unfortunately, I am the only and first person. My company is very small.
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Polar_Ice
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Post by Polar_Ice »

I went through issues with foreign income last year on my 2009 taxes and it was hard to find good help with my problems. You can call the IRS but they just point you to the forms. They would say read publication XX and you will find your answer on a lot of the questions I would ask. :roll: You can easily waste a lot of time and still not get a an accurate answer. I would suggest finding a accountant with a lot of experience with foreign income.

I saw this guy in Kiplingers for foreign taxes. He is an accountant and lawyer.

http://www.taxmeless.com/
livesoft
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Post by livesoft »

When I lived overseas, I excluded all my income from US taxes.

If your company is very small, then that's even better: Talk directly to the person who does payroll and tell them you do not want any US federal income tax withheld from your paycheck. They should be able to figure this out for you and tell you what form to fill out.
Topic Author
cheesepep
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Post by cheesepep »

Thanks for the replies. I submitted the form and am hoping for the best. That way, I can save for a house much sooner than before with all the extra income that I will be getting.
Topic Author
cheesepep
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Post by cheesepep »

cheesepep wrote:Thanks for the replies. I submitted the form and am hoping for the best. That way, I can save for a house much sooner than before with all the extra income that I will be getting.
I submitted the form 673 to my boss and was told that submission of the form is premature. I would have to wait until 1 year after I moved to my new tax home in the foreign country before I could submit the form (meaning around April 2011 is when I can submit the form).

Do I need to wait one year after I moved to my tax home in the foreing country or can I file form 673 now (I have been in the foreign country for a month now)? My boss is not a tax lawyer.
livesoft
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Post by livesoft »

Have you read about the Foreign Earned Income Exclusion? When I used it, there were 2 ways to qualify: 330 days out of 365 outside the US and then by establishing foreign residency. I used the 330 days for the first year, then foreign residency after that.

The problem with 330 days is that if you come back to the US on business or for Christmas or other vacations, you can blow it. The problem with foreign residency is that I think it takes time to establish it. So from where I sit in internet-land, I have to agree with your boss. After all, he could fire you and where would you be?

I think in April 2011, you will not qualify for the foreign earned income exclusion, but may qualify later in the year. Thus, you may wish to file an extension, but of course your refund will be stuck in the hands of the IRS for a while.
Topic Author
cheesepep
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Post by cheesepep »

Am I wrong to qualify for the bona fide residence test? I stayed in the foreign country for less than 1 year but I have signed the necessary papers to establish residence here.

Can I not qualify for a partial withholding of the $91,400 federal earned income exclusion if I have been in the foreign country for less than 1 tax year, but have establish residence here already? I am already paying taxes to the foreign government here.
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MossySF
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Post by MossySF »

http://www.irs.gov/businesses/small/int ... 60,00.html

See the last 2 paragraphs of the above link. You have to stay for 1 tax year first. Then you can prorate the previous year.
Topic Author
cheesepep
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Post by cheesepep »

MossySF wrote:http://www.irs.gov/businesses/small/int ... 60,00.html

See the last 2 paragraphs of the above link. You have to stay for 1 tax year first. Then you can prorate the previous year.
Thanks MossySF. For my stay in the foreign country from April 2010 to December 2010, do I file my taxes and prorate the amount from April 2010-December 2010 when I file my taxes in 2012? I mean do I need to file an amended return for the 2010 tax year or can I do it all in one fell swoop in 2010 for the 2011 and 2010 tax years?

For the tax due April 15, 2010, am I only qualified to reduce my federal income taxes strictly based on the amount of taxes I paid to the foreign government?
Michael B
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Post by Michael B »

You file an extension in 4/11 postponing your 2010 tax return due date to august. By august you qualify as a bona fide resident and then file 2010.

If you have been assigned overseas your company should not be withholding unless they feel you will not meet the foreign income exclusion.
livesoft
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Post by livesoft »

cheesepep wrote:... (I have been in the foreign country for a month now)?
I'm confused. If you have only been in the foreign country for a month, how can you have established residency back to April 2010?

I'm just curious if you have read the instructions to Form 2555:
http://www.irs.gov/instructions/i2555/index.html which describes all this including the previous response by MichaelB.
Topic Author
cheesepep
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Post by cheesepep »

Thanks Michael B and livesoft.

Michael B, do you mean in April (and not August?), the one year of when I have stayed in this country?

To livesoft, yes, I mean April 2010 and not the 1-month earlier mentioned.

I will also further read your link a little later on (no, I did not read it for some reason, only the link for form 673, sorry for my haste in this). A little tired now.
livesoft
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Post by livesoft »

The PDF version may be easier for you to read. Get it at www.irs.gov .
Topic Author
cheesepep
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Post by cheesepep »

Ok, I read the pdf linked here:

http://www.irs.gov/pub/irs-pdf/i2555.pdf

I am still ever so slightly confused by these two passages in the PDF file:
When to claim the exclusion(s). The first year you plan to take the foreign earned income exclusion and/or the housing exclusion or deduction, you may not yet have met either the physical presence test or the bona fide residence test by the due date of your return (including the automatic 2-month extension, discussed earlier.) If this occurs, you can either:
1. Apply for a special extension to a date after you expect to qualify, or
2. File your return timely without claiming the exclusion and then file an amended return after you qualify.
and
Bona Fide Residence Test
To meet this test, you must be one of the following: • A U.S. citizen who is a bona fide resident of a foreign country, or countries, for an uninterrupted period that includes an entire tax year (January 1–December 31, if you file a calendar year return)
I first came to the foreign country on April 11, 2010 and taxes are due April 15, 2010 (without extension). This is my first full year in the country. However, I do not believe that I can be in the foreign country for an entire tax year, Jan 1-December 31, or can I? The two quotes seem slightly contradictory to me. Sorry for being so dense.

I understand Michael B's point and it seems good to me if he meant April 11 and not August.

Some clarification would be appreciated about the two contradictory passages above (at least to me).[/quote]
CFM300
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Post by CFM300 »

This is the correct answer.
Michael B wrote:You file an extension in 4/11 postponing your 2010 tax return due date to august. By august you qualify as a bona fide resident and then file 2010.
Topic Author
cheesepep
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Post by cheesepep »

Can you please explain why it is August?
CFM300
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Post by CFM300 »

cheesepep wrote:Can you please explain why it is August?
Sorry, maybe it's not August. I'll take a shot at explaining the tax policies as I understand them.

Scenario 1
Assume you move to a foreign country April 11, 2010, and stay outside the US for at least 330 days until Aprill 10, 2011. You would then qualify for the Foreign Earned Income Exclusion based on the Physical Presence test, and could exclude all of your 2010 foreign earned income up to $91.5k (or whatever the current limit is) when you file your taxes on April 15, 2011.

Scenario 2
Assume you move to a foreign country April 11, 2010, and you wish to exclude your 2010 foreign earned income using the Bona Fide Resident test. You must set up a tax home in a foreign country and maintain that tax home for one *calendar* year (January 1, 2011 - December 31, 2011). Thus, you could not qualify under the Bona Fide resident test until January 1, 2012 at the earliest. You would thus request an extension until January 1, 2012. On that day, you would file your 2010 return, excluding your 2010 foreign income under the Bona Fide resident test. On April 15, 2012, you would file your 2011 tax return, again excluding your 2011 foreign income under the Bona Fide resident test.

Here's a link to the IRS site which explains how you you can file an extension until January 1, 2012.

http://www.irs.gov/businesses/small/int ... 82,00.html

Hope some of that helps.
Topic Author
cheesepep
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Post by cheesepep »

Many many thanks CFM300. You are a god among men. I understood it all. Many thanks to other people who have helped me also. I appreciate it a lot.

For my situation, since I don't want to wait until Jan 1, 2012 to file my 2010 tax return under the Bona Fide test, I am going to try to qualify for the Physical residence test (330 days).

I've been out for almost 3 weeks now so I should be careful.

Again, thanks. :P :D
CFM300
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Post by CFM300 »

Glad to have helped! The US tax code is a maze.

You might want to poke around the following site, particularly the "Resources." Lots of useful info there.

http://www.overseastaxservices.com/

Good luck!
Michael B
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Post by Michael B »

cheesepep wrote:Can you please explain why it is August?

Not august. My memory failed me. You are entitled to up to 6 months extension. The first 2 months are automatic (no preapproval needed), the next 4 need IRS approval (form 4686). The IRS will approve a further extensions if they are to meet residence or physical presence requirements as long as you pay the tax due by 6/15. From Pub 54

You generally cannot get an extension of time to file of more than 6 months. However, if you are outside the United States and meet certain tests, you may be able to get a longer extension.

You can get an extension of time to file your tax return if you need the time to meet either the bona fide residence test or the physical presence test to qualify for either the foreign earned income exclusion or the foreign housing exclusion or deduction. The tests, the exclusions, and the deduction are explained in Foreign Earned Income Exclusion.

You should request an extension if all three of the following apply:

* You are a U.S. citizen or resident alien
* You expect to meet either the bona fide residence test or the physical presence test, but not until after your tax return is due
* Your tax home is in a foreign country (or countries) throughout your period of bona fide residence or physical presence, whichever applies

Generally, if you are granted an extension, it will be to 30 days beyond the date on which you can reasonably expect to qualify under either the bona fide residence test or the physical presence test. However, if you have moving expenses that are for services performed in 2 years, you may be granted an extension to 90 days beyond the close of the year following the year of first arrival in the foreign country.

Cheesepep correctly described how to qualify. If you truly qualify either way, but not yet, the IRS will let you postpone filing until you do and then apply it retroactively.

Needless to say, overseas taxes are complex. Tax sw falls short, as do most tax books. If you are planning on staying abroad for a while, you might want to familiarize yourself with pub 54/

Good luck. Michael
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