Integrity Legal

5th February 2011

One of the Founding Fathers of the United States, and a true Renaissance man, Benjamin Franklin was once quoted as stating, “In this world nothing can be said to be certain, except death and taxes.” Truer words may never have been uttered as taxation and death seem as ubiquitous now as they likely did in the 1700′s. With that in mind, this blogger has recently noticed a great many American people outside of the USA who have misconceptions regarding the current state of American law with regard to taxation of Americans resident abroad. It would appear that there are those under the mistaken impression that individuals outside of the United States are not subject to American income tax. In fact, nothing could be further from the truth pursuant to current United States tax rules.

To quote directly from the official website of the Internal Revenue Service: IRS.gov:

If you are a U.S. citizen or resident alien, the rules for filing income, estate, and gift tax returns and paying estimated tax are generally the same whether you are in the United States or abroad. Your worldwide income is subject to U.S. income tax, regardless of where you reside.

As can be seen from the above quotation, Americans working or earning income abroad are still subject to American taxation regardless of the fact that they are physically located outside of the jurisdictional confines of the United States of America. There are many who do not agree with the current tax policies regarding individuals resident abroad, but as the law currently stands Americans must pay taxes even on income earned outside of the USA. That said, from a practical perspective there are some benefits accorded to Americans residents abroad. To quote further from the same page of the Internal Revenue Service website:

If you reside overseas, or are in the military on duty outside the U.S., you are allowed an automatic 2-month extension to file your return until June 15. However, any tax due must be paid by the original return due date (April 15) to avoid interest charges.

Of further note to Americans resident abroad is the foreign earned income exclusion which may allow Americans resident abroad to obtain a exemption from paying taxes on earned income up to a certain specified level. To quote directly from the Internal Revenue Service’s web page regarding the Foreign Earned Income Exclusion:

If you are a U.S. citizen or a resident alien of the United States and you live abroad, you are taxed on your worldwide income. However, you may qualify to exclude from income up to an amount of your foreign earnings that is now adjusted for inflation ($91,400 for 2009, $91,500 for 2010, $92,900 for 2011). In addition, you can exclude or deduct certain foreign housing amounts.

It should be noted that “living abroad” should not be construed to mean short term periods of residence outside of the USA. In fact, one wishing to claim the aforementioned exclusion would likely be required to spend a substantial period of time outside of the USA. In fact, the IRS currently uses a Physical Presence Test in order to determine whether or not an American who has been abroad qualifies for the foreign earned income exclusion. To quote further from another page of the IRS.gov website:

You meet the physical presence test if you are physically present in a foreign country or countries 330 full days during a period of 12 consecutive months. The 330 qualifying days do not have to be consecutive. The physical presence test applies to both U.S. citizens and resident aliens.

This posting is merely intended to act as a primer for those interested in American tax issues and how United States tax rules impact Americans resident abroad. This posting should not be viewed as a complete or comprehensive analysis of an individual’s current tax situation. Those interested in obtaining advice regarding American tax matters are well advised to contact a licensed professional. At the time of this writing the Integrity Legal Network includes an American attorney licensed to practice law before the United States Tax Court.

For related information please see: Expat Tax Return.


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