Frequently Asked Questions - Expats

Whether you are new to the Expat life or a veteran Expat with many years of overseas experience, the following information will serve you well in qualifying for and maintaining the foreign earned income exclusion.

Common Misconceptions

“Prorated” Exclusion - The only way to receive any FEI exclusion under PPT is to be overseas for a full 12 months, and be present in a foreign country for a full 330 days during that time period.  “Busting” days, or having less than 330 full foreign days, does not qualify a taxpayer for a “prorated” exclusion.

Timely Filing of Tax Returns – To receive the foreign earned income exclusion, the IRS requires that you file within 1 year from the original due date of the return (determined without regard to any extension). Worst-case scenario – if you file your tax return late and owe a balance, the IRS can disallow your foreign earned income exclusion, even if you have earned it, thus making 100% of your earnings taxable without any benefit of exclusion. The bottom line here is that you should file your tax return as soon as possible, even if you are still working overseas.

EOC R&R in the US – End of contract (EOC) R&R’s in the US count against your 35 days allowed in the US for the Physical Presence Test, if they fall within the twelve-month period you are using to calculate the Physical Presence Test.

Frequently Asked Questions

Q: I have a civilian contractor ID or other type of military identification. Do I qualify for the combat zone tax exclusion?
A: No. The only exclusion available to Expats working in a combat zone is the foreign earned income exclusion. This is earned by qualifying for the presence test or bona fide residence test. (See Combat Zone section for more information)
Q: If I don’t make the one-year mark can we just prorate and take a partial exclusion?
A: No. For your first year overseas you must qualify for either the physical presence test or bona fide residence test in order to receive any of the foreign earned income exclusion. After your first year you may be able to prorate future years.
Q: How is my exclusion calculated in my first year if I started working overseas mid-year?
A: If you start in the middle of a year you should request an extension of time to file your tax return so that you can file after you meet the qualifying test. Then you prorate the exclusion between the two years that your 12 month qualifying period runs into.
Q: My income was less than the current year exclusion amount. Do I still have to file a return?
A: Yes. Every Expat must file a return to request the foreign earned income exclusion. To qualify for the exclusion the return must also be filed in timely manner or this may cause your election to be rejected and your exclusion disallowed.
Q: My company did not issue a W-2 because they are a foreign affiliate or a foreign company. Do I have to report this and file a return?
A: Yes. Any US citizen with income from sources outside the United States (foreign income) must report all of that income on a tax return. This is true whether you reside inside or outside the United States and whether or not you receive a form 1099 statement from a foreign employer.
Q: How can I determine if I have the right CPA?
A: As a CPA, I suggest only using CPAs for your tax and accounting needs. A CPA is required to complete stringent college and post-college training that allows them to receive and maintain a license. Anyone else can pretend to be an accountant or tax preparer. Ask them to provide referrals of clients that work with you. Ask your coworkers who they use. See if the price is reasonable. Too low or too high means they probably don’t prepare many overseas returns. Do not use CPAs who will not meet with you or provide you with a physical address. If you have to explain what an Expat is to your preparer, you should probably reconsider your choice.
Q: Does my CPA need to be local?
A: No. In fact, most CPAs that are qualified to assist Expats will not be found in your hometown, or your state for that matter.
Q: How do I go about filing without coming to your office?
A: At our firm we make filing as convenient as going to your local CPA. We can gather all the necessary documentation to prepare an accurate and timely return via the Internet, email, fax and phone. After reviewing the results via phone and email, we then e-file, mail or email the return back to the client for filing. We provide exceptional personal service to the Expat or their designee, if necessary.
Q: Should I use a franchise tax preparer?
A: This is a matter of choice and although they may appear to be convenient they will never be able to provide the high level of service a CPA can provide. In many cases, franchise fees for similar services are higher but with less value. In the past, our firm has amended and revised returns that were previously prepared by franchises. These amendments and revisions saved our Expat Clients over $200,000. Imagine the tragedy of those who didn’t second guess their preparer. However, this doesn’t imply that all CPAs know how to handle Expat taxes. Only an Expat CPA knows how to best serve your tax needs.
Q: What is the Foreign Earned Income Exclusion?
A: The foreign earned income exclusion is an exclusion that will reduce your foreign earned income if you meet a qualifying test, such as the bona fide residence or physical presence test.
Q: What are the maximum amounts of foreign income that can be excluded?
A: The annual income exclusions are:

  • 2007 - $85,700
  • 2008 - $87,600
  • 2009 - $91,400
  • 2010 - $91,500
Q: How can I claim the Foreign Earned Income Exclusion?
A: You must have Foreign Earned Income; your Tax Home must be in a Foreign Country and meet one of the qualifying tests. There are two types of qualifying tests for Expats: The Physical Presence Test and the Bona Fide Residence Test. The most common test for Expats on contract assignments is the Physical Presence Test. The physical presence test requires you to spend a full 330 days overseas during a 12-month period and not be in the US for more than 35 days during that same 12 months. The Bona Fide residence test is a little more restrictive. Your intent must be to work overseas indefinitely and make your permanent tax home and quarters in a foreign location. Questions of bona fide residence are determined according to each individual case; therefore you should consult an Expat CPA to see if you qualify.
Q: What Extensions are available to Expats?
A: If an Expat is overseas on April 15th you will receive an automatic two-month extension. You must make a statement to the IRS when you file and you should pay any estimated taxes by April 15th to avoid penalty and interest. If this is your first year working overseas, there is a special extension that allows you to file 30 days after you meet your presence test. All the normal extensions are also available to Expats.
Q: I haven’t filed for previous years that I worked overseas. Can I still file?
A: You can and you need to as soon as possible. If for some reason you are audited later on and the IRS catches the fact that you did not file, they may not allow you to take the foreign earned income exclusion, even if you earned it, because it was not taken in a timely manner.
Q: My last tax preparer treated me as Self-Employed and withheld SE Tax. Is this correct?
A: In most cases no. If you are actually self-employed or an independent contractor working for yourself and not working directly for a contractor or another corporation, then you may be self-employed and subject to the self-employment tax. Usually you will receive a form 1099 that shows you were self employed or considered an independent contractor. If you’re not self-employed, you should file an amended return immediately to get a refund. This is a common mistake among franchises and non Expat CPA’s. Keep in mind that if you did receive a 1099, you may be able to deduct certain job-related expenses to decrease your taxable income.
Q: I have a lot of expenses such as cell phone, calling cards, gear, supplies, laptop, etc. Can I deduct these expenses?
A: Job related expenses can be deducted if you meet the criteria for itemizing instead of taking the standard deduction.
Q: Can I deduct my storage fees while overseas?
A: Yes.
Q: Can I take the same credits and deductions while working overseas that I would have taken if in the US?
A: A. In most cases the answer is yes. However, some credits that phase-out over certain modified adjusted gross income (MAGI) levels will not be available because your foreign earned income is added back in determining your MAGI.
Q: I have out-of-pocket housing costs. Can I deduct these?
A: You may be eligible for the housing deduction, which will increase your foreign earned income exclusion. Certain qualified housing costs can be excluded and the housing must be in a foreign country.
Q: I have a lot more questions and hear so many different things from others working overseas. Where can I find the correct answers for Expats?
A: There are many scenarios, myths and half-truths about working overseas. The rumor mill seems to work overtime at overseas job sites. To find out the truth about working overseas, you have a couple of options. You can go to the IRS website and research it yourself (provided you already have a working knowledge of taxes, and several hours of free time on your hands). Or, you can spend your time doing what you do best, and leave the tax research up to us, Palazzo & Company, PLLC (which is what we do best). Contact us directly anytime with your questions or concerns about the tax ramifications of working overseas.