Expat Tax – Counting the Days to Save Taxes With Form 2555
Posted on December 31, 2010 | No Comments
Stephen C Fox asked:
As a U.S. expat, you can exclude $91,400 or more of your foreign earned income on 2009 expat tax return. You and your spouse may each get the exclusion on Form 2555, each subject to the limit. To qualify for the foreign earned income exclusion, you must meet each of two tests. The exclusion limit is calculated based on days during the year that you met both tests.
Test one: your tax home must be in a foreign country or countries. Tax home means where you live and work. For people trying to deduct travel expenses as work related, the IRS likes to say you live where you work. For expats, they sometimes try to say your home stayed in the U.S. If you are working outside the U.S. and your primary residence is outside the U.S., then you qualify. If you keep a house in the U.S. and don’t rent it out (or don’t try to rent it out), the IRS may try to say you don’t qualify.
Test two: for each tested day EITHER you are a bona fide resident of a foreign country for that day and for a full tax year OR that day was in a 12 month period during which you were outside the U.S. for 330 days.
Bona fide resident means you are legally resident in the country. Your visa must permit you to live and work there, and not just for a short period. For example, if you have a Swiss work permit visa and rent an apartment in Zurich as your only residence, you are a bona fide resident. However, if you declare to the government of the country that you are not a resident (such as on a tax return or as part of a visa), then you cannot claim to be a bona fide resident.
To meet the bona fide resident test, your bona fide residence must include a full U.S. tax year. For example, if your residence began June 1, 2008, it would need to continue through December 31, 2009, for any of the 2008 days to qualify.
The 330 days out of 12 months test (the physical presence or 330 day test), can be very tricky to calculate. Every day in every year is in 365 (or 366) different, overlapping 12 month periods. You need qualify for only one of these periods for each day. Any part of a day spent in the U.S. counts as a U.S. day, EXCEPT however presence during transit between two foreign points. Thus, your day of arrival or departure from the U.S. day is normally a U.S. day. But if you are merely in the U.S. for a connecting flight or flights in an otherwise foreign trip, that doesn’t count as U.S. time.
For example, Joe moves to Spain, leaving the U.S. on July 1, 2008, arriving in Spain July 2. He returns to the U.S. on May 31, 2009. He leaves for Italy on July 20, 2009, arriving the same day. He stays out of the U.S. until late 2010. Joe qualifies for all the days from July 2, 2008 until late 2010. How? His first qualifying period is July 2, 2008, to July 1, 2009. In this 12 month period, he was out of the U.S. 333 days (July 2 to May 30). Another period that qualifies is June 16, 2009 to June 15, 2010, during which Joe was out of the U.S. for 330 days (July 20 to June 15). These two periods overlap and cover all days in 2009. Thus, for 2009, Joe can exclude at least $91,400.
In addition to the basic exclusion, expats can deduct or exclude housing costs in excess of 16% of the basic exclusion (with limits). If Joe spent $2,000 per month for rent for 2009, his housing exclusion or deduction will be $9,374.
Expats qualifying for the bona fide resident test do not need to count their days outside the U.S. However, all expats do need to count their work days in the U.S. and outside the U.S. The foreign earned income exclusion applies only for income earned outside the U.S., not for the U.S. portion of earnings. Thus, if Jane’s salary was $96,000, she worked 240 days in 2009, and 18 of those days were in the U.S., she could only exclude $88,800: her salary at $400 per work day for the 222 days worked outside the U.S.
Expat taxes can be complicated. Count your days every year if you do not already meet the bona fide resident test. Plan your U.S. travel carefully. And get the help you need doing your expat tax return.
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As a U.S. expat, you can exclude $91,400 or more of your foreign earned income on 2009 expat tax return. You and your spouse may each get the exclusion on Form 2555, each subject to the limit. To qualify for the foreign earned income exclusion, you must meet each of two tests. The exclusion limit is calculated based on days during the year that you met both tests.
Test one: your tax home must be in a foreign country or countries. Tax home means where you live and work. For people trying to deduct travel expenses as work related, the IRS likes to say you live where you work. For expats, they sometimes try to say your home stayed in the U.S. If you are working outside the U.S. and your primary residence is outside the U.S., then you qualify. If you keep a house in the U.S. and don’t rent it out (or don’t try to rent it out), the IRS may try to say you don’t qualify.
Test two: for each tested day EITHER you are a bona fide resident of a foreign country for that day and for a full tax year OR that day was in a 12 month period during which you were outside the U.S. for 330 days.
Bona fide resident means you are legally resident in the country. Your visa must permit you to live and work there, and not just for a short period. For example, if you have a Swiss work permit visa and rent an apartment in Zurich as your only residence, you are a bona fide resident. However, if you declare to the government of the country that you are not a resident (such as on a tax return or as part of a visa), then you cannot claim to be a bona fide resident.
To meet the bona fide resident test, your bona fide residence must include a full U.S. tax year. For example, if your residence began June 1, 2008, it would need to continue through December 31, 2009, for any of the 2008 days to qualify.
The 330 days out of 12 months test (the physical presence or 330 day test), can be very tricky to calculate. Every day in every year is in 365 (or 366) different, overlapping 12 month periods. You need qualify for only one of these periods for each day. Any part of a day spent in the U.S. counts as a U.S. day, EXCEPT however presence during transit between two foreign points. Thus, your day of arrival or departure from the U.S. day is normally a U.S. day. But if you are merely in the U.S. for a connecting flight or flights in an otherwise foreign trip, that doesn’t count as U.S. time.
For example, Joe moves to Spain, leaving the U.S. on July 1, 2008, arriving in Spain July 2. He returns to the U.S. on May 31, 2009. He leaves for Italy on July 20, 2009, arriving the same day. He stays out of the U.S. until late 2010. Joe qualifies for all the days from July 2, 2008 until late 2010. How? His first qualifying period is July 2, 2008, to July 1, 2009. In this 12 month period, he was out of the U.S. 333 days (July 2 to May 30). Another period that qualifies is June 16, 2009 to June 15, 2010, during which Joe was out of the U.S. for 330 days (July 20 to June 15). These two periods overlap and cover all days in 2009. Thus, for 2009, Joe can exclude at least $91,400.
In addition to the basic exclusion, expats can deduct or exclude housing costs in excess of 16% of the basic exclusion (with limits). If Joe spent $2,000 per month for rent for 2009, his housing exclusion or deduction will be $9,374.
Expats qualifying for the bona fide resident test do not need to count their days outside the U.S. However, all expats do need to count their work days in the U.S. and outside the U.S. The foreign earned income exclusion applies only for income earned outside the U.S., not for the U.S. portion of earnings. Thus, if Jane’s salary was $96,000, she worked 240 days in 2009, and 18 of those days were in the U.S., she could only exclude $88,800: her salary at $400 per work day for the 222 days worked outside the U.S.
Expat taxes can be complicated. Count your days every year if you do not already meet the bona fide resident test. Plan your U.S. travel carefully. And get the help you need doing your expat tax return.
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