Understanding the tax code alone is already an intimidating task, add being a US Expat in the mix, and it becomes even more complex and confusing. To avoid committing mistakes or missing deadlines and forms to file, follow our series of blogs where we discuss important things expats should keep in mind!
Missed part 1? Here’s the link to it: Things You Should Know About US Expat Taxes Part 1
Make Sure You Pass the Bona Fide Residency Test
You must pass the bona fide residence test to qualify for the foreign earned income exclusion. The bona fide residence test applies to U.S. citizens and to any U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect.
Whether you are a bona fide resident of a foreign country is determined by the facts of your situation and may include such factors as your intention or purpose for being in the foreign country, your activities in the foreign country, and whether you paid taxes to the foreign country, among other things. The IRS decides whether you qualify as a bona fide resident of a foreign country largely on the basis of facts you report on Form 2555, Foreign Earned Income. The IRS cannot make this determination until you file Form 2555.
Monitor Your Travel Time Carefully
If you plan to qualify for Foreign Earned Income Exclusion via Physical Presence Test, make sure that you have counted your travel days correctly. To meet the physical presence test, you must be physically present in a foreign country or countries for at least 330 full days during a 12-month period including some part of the year at issue. You can count days you spent abroad for any reason, so long as your tax home is in a foreign country.
There are also other conditions to note as you count travel time. Make sure you know and consider this in counting your travel time.
Keep in mind that if you have reported wrong travel days calculations, you could face huge penalties on your tax return.
File for an Extension
If you are worried that you won’t qualify for the Foreign Earned Income Exclusion and will miss out on a lot of tax benefits, but know that you will qualify in the near future, you can apply for an extension to file using Form 2350.
This form is used to ask for an extension of time to file your tax return only if you expect to file Form 2555 – Foreign Earned Income and you need the time to meet either the bona fide residence test or the physical presence test to qualify for the foreign earned income exclusion. You should file this form on or before the due date of your Form 1040 or 1040SR.
Educate Yourself About Tax Treaties
Determine if the foreign country you are staying in has a tax treaty with the US and educate yourself how it can affect your US taxes. The US has tax treaties with a number of foreign countries.
Check this IRS page that provides links to tax treaties between the United States and particular countries: https://www.irs.gov/businesses/international-businesses/united-states-income-tax-treaties-a-to-z
If you are an expat and need help with your taxes, our Enrolled Agent can help you! Contact us today at firstname.lastname@example.org or at 713-855-8035.