As awareness of US taxpayers living abroad grows over the implications of the Foreign Account Tax Compliance Act (FATCA), many are asking how they can mitigate their potential tax bills.
FATCA is legislation aimed at revealing the financial assets being held abroad by a US citizen so that they can be taxed accordingly.
However, there are two tests which are relevant for Americans living overseas so that they can qualify for allowances on their income for when they need to file their tax returns.
Some of these benefits include the foreign tax credit, foreign housing credit and foreign income exclusion (FEIE).
For the residence test to be applicable for a US citizen living abroad they need to prove that they have established a permanently established a residence in another country.
Tax credits
A second test, also known as the physical presence test, states that the taxpayer should be out of the US for 330 days in a 365 day period.
Under other rules for an expat to get tax credits under the bona fide residence test, they must meet the following requirements.
- They must have a foreign income such as salaries, wages or bonuses though money earned through self-employment also counts.
- The foreign earned income must not include pensions, dividends or interest payments.
- The taxpayer needs to have a home abroad which is either a permanent residence or for work purposes. An expat would also need to have a job that is to last for a year to establish a tax home although if they keep a property in the US they will not be legible for this option.
It’s this test which is the biggest hurdle for those who are employed as military contractors overseas to meet.
Proof of residence
A taxpayer must be resident in a country abroad for the full tax year, although simply living overseas does not mean automatic qualification – proof of an intention to stay in that country for a minimum of 12 months must also be shown.
The rules around what exactly constitutes a bona fide resident are vague at the best of times but there some key issues such as establishing an expat status as a resident living overseas which will include their intentions to integrate with a foreign culture by having a bank account and creating work relationships.
The bottom line to the test is to tackle any potential conflict for double taxation so an expat cannot claim to the country they live in that they are non-resident and then tell US tax authorities that they are resident overseas.
