Expat Tax Help Online

Any self-employed American expatriate can qualify for the Foreign Earned Income Exclusion.  Unlike an employed expat, however, a multitude of complex issues arise concerning what can be deductible against foreign income.  Consider tax home versus main home.  Suppose you provide a consulting service from your main home in your foreign country of residence, but your work takes you stateside where you work for six weeks in the offices of a client in Baltimore Maryland.  There you generate 80% of your earnings in 2007.  Do these earnings qualify for the Foreign Earned Income Exclusion.

As long as you report and pay taxes on these earnings to the foreign tax authority, they should qualify.  But what about expenses for lodging and meals?  If IRS considers Baltimore your tax home, these expenses are not deductible.  IRS publication 463 states: ‘Generally your tax home is your regular place of business or post of duty, regardless of where you maintain your family home. . . . your tax home (can be) your main place of business.’  But elsewhere IRS states:  If you expect an assignment or job to last for one year or less, it is temporary.  In this instance, those lodging and meal expenses would be deductible.  As long as the auditor agrees.

Residents of foreign countries, including American expatriates, are often required to report and pay taxes on world-wide income.  A resident is anyone who has been physically present for 183 days.  So even though foreign earnings up to the $87,500 foreign earned income exclusion (FEIE) are excluded from US taxation, most foreign countries will tax those and other earnings of residents.

Generally when reporting foreign earnings stateside, the best advantage is to apply FEIE rather than the Foreign Tax Credit (FTC) on foreign earnings below the FEIE threshold.  Once the threshold is met, FTC can then be applied against foreign taxes paid or accrued in order to avoid US taxation over $87,500.  But as income rises, the complex calculations to arrive at FTC for the tax year are not always enough to fully avoid being double taxed.  But for the moderately wealthy, FTC does its job 100%. 

Qualifying for the Foreign Earned Income Exclusion (FEIE) is relatively simple.  First, your tax home must be in a foreign country through a qualifying residency period.  Your tax home is where you are indefinitely engaged as an employee or self-employed person.  Second, you must have had foreign earned income:  salary, self-employment, and/or employer-provided meals, lodging or car. as well as certain allowances (Publ 54).  Third, under the Bona Fide Residency Test, you must have been residing in one or more foreign countries for the entire tax year (usually calendar).  Under the Physical Presence Test, you must have been physically present in one or more foreign countries for at least 330 days during the calendar or fiscal year or else 12 months starting or ending in 2007.  These rules apply to US citizens and US resident aliens.

Once foreign residency is established, earnings are considered foreign even if sourced from the United States.  Foreign income above the $87,500 threshold is subject to US taxation.

In determining whether to file a tax return, the Foreign Earned Income Exclusion does not count.  Although for 2007, $87,500 in foreign earned income can be excluded from taxation by the exclusion, the income earned in a foreign country is still counted against your Filing Status.  Suppose you are married and earned $80,000 abroad.  This income would be excluded from taxation by the foreign earned income exclusion but not from reporting on a tax return.  $80,000 exceeds the Filing Status amount of $17,500 for a couple who would file jointly.  Failure to report this income can result in IRS denying the foreign earned income exclusion and thus taxing this already taxed foreign income stateside.

A 2007 U.S. tax return must be filed if your world-wide gross income exceeds your Standard Deduction and Exemption amount(s) according to your filing status:

Single                                                $8,750
  65 or older                                     10,050
Head of Household                          11,250
  65 or older                                      12,550
Qualifying widow(er)                      14,100
  65 or older                                      15,150
Married filing jointly                       17,500
  One Spouse 65 or older                18,550
  Both Spouses 65 or older             19,600
Married Filing Separately               3,400