Marc Strohl

Marc Strohl is the principal of Protax Consulting Services Inc., a US based firm offering tax accounting and consulting services for expatriates.

Click here to read an in-depth interview with Marc or click here to submit a question for Marc to answer publicly next month (please note that Marc is only able to answer a selection of questions received but all questions are read and considered.)

Click here if you are interested in using Protax to file your US tax return.

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07/03/10 - S.P. asks:

"Marc,

What are the rules for filing as a "Bona Fide" Non Resident status? Does filing "Bona Fide" Non Resident provide relief of the Physical Presence requirement of 330 days of remaining outside the US? I am a Defense Contractor working in Iraq and I am considering filing under this status so I can spend more than 35 days annually in the US."

Marc's reply:

To qualify for the FEIE you must meet two tests: 1) the Tax Home Test (THT) and 2) either a) the Bona Fide Residence Test (BFR) or b) the Physical Presence Test (PPT).

The THT requires you to have your ‘tax home’ abroad for a full 12 month period. Your tax home is generally perceived as your main place of business, employment or post of duty and is the place where you are permanently or indefinitely (must be in excess of one year) engaged to work as an employee or self-employed person.

The BFR is a strictly qualitative test for US citizens or resident alien nationals of countries which have an income tax treaty with the US. BFR requires you to first be abroad for one full calendar year (i.e. a January 1 to December 31 period). During that period of bona fide residence in a foreign country, you can leave the country for brief or temporary trips back to the US for vacation or business.

The PPT is for US citizens or US resident aliens and is a strictly quantitative test requiring 330 full days (a full day is a complete twenty four hour period) of presence abroad out of any 12 month (365 day) fiscal consecutive period. Thus, this can incorporate a non calendar period, or any fiscal period, as for example April 21, 2009 to April 20, 2010.

You are not allowed to file Form 2555 or Form 1040 until meeting both of the above two tests: 1) the THT and 2) either the a) the BFR or b) the PPT tests. You may, therefore, be required to substantially delay your filing until such time as both tests are met. Form 2350 - Application for Extension of Time to File US Income Tax Return - would be the correct extension form to employ in these circumstances.

Typically the PPT is used in years of transition, that is in both years of expatriation abroad out of the US and in years of repatriation back to the US. PPT offers an advantage over BFR in these transition years for two reasons:

1.If up to the point of expatriating or repatriating the taxpayer has not been back to the US in excess of 35 days in the 12 month fiscal consecutive period under PPT, there is an opportunity to use those 35 days (365 consecutive day period less the 330 days required to meet the test) as slide days to increase the total days abroad for the purposes of calculating PPT. This is accomplished by either sliding the taxpayer back or ahead respectively by those 35 days, depending on whether they are expatriating or repatriating. This is used, as above, in partial years abroad where the FEIE is prorated by those days abroad over 365. Therefore, using the PPT we may be able extend the period covered by the FEIE using the 35 slide days in a US person's expatriating or repatriating years to increase the amount of the fractional exclusion that we claim on their behalf. So it is prudent planning in the expatriating and repatriating years to limit your days back to the US, such that we can optimize these 35 slide days to obtain excess FEIE, and

2.In transition, expatriating years meeting the BFR test will encompass waiting for a full calendar tax year to elapse subsequent to the date of US departure and prior to filing that year’s tax return. Whereas using the PPT test, if the qualifications are met, may allow for a US tax filing in advance.

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06/02/10 - Joseph asks:

"Hi Marc, I'm a US citizen who left for Australia in 1984. I became an Australian citizen in 1989 so i have dual citizenchip. I need to come back to the US to look after my elderly parents - my question is if I'm bringing with me some money, do I have to pay any taxes on my money or any other charges at all? Thank you for your help."

Marc's reply:

As in Australia, the US has an income tax, not an "... I am taking money with me tax...", the assumption is that the money you are bringing back to the US has all been reported to Uncle Sam already and is therefore after tax income.

However, please always remember that as a US citizen (or for that matter green card holders) you have a US filing obligation on worldwide income for life if your income exceeds the annualized threshold amount- the combination of your exemption and standard deduction.

However, there are many opportunities to use special exclusions and credits in your case while abroad, but to use them you must first qualify and file a tax return to receive these exclusions and credits. The foreign earned income exclusion (FEIE) amount 2009-$91,400 (2008-$87,600) - per spouse. The exclusions are NOT available to government wages earned abroad. Effective January 1, 2006 as amended by IRC Sec. 515 of the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) is "Stacking". "Stacking" results in the next dollar of income taxed at a much higher marginal rate of tax, as though it were the $91,401st dollar of income earned.

There is also the foreign housing exclusion (HE) (and deduction (HD) in the case of a self-employed person), which can augment the $91,400 FEIE. Effective January 1, 2006 as amended by IRC Sec. 515 of TIPRA there are two changes regarding the HE and HD: 1) A new base (deductible) amount that has risen and 2) An overall effective cap on the total qualified housing costs eligible for consideration for either the HE or HD, at 30% of the FEIE of $91,400. However further to the ratification of TIPRA, the IRS issued IRS Notice 2006-87- which allows for this cap to be overridden in certain circumstances. Please consult with us on this.

After the two above exclusions are considered should foreign earned or unearned income still exist, a US Foreign Tax Credit (FTC) (i.e.- foreign taxes paid on foreign income, if any), in combination should wipe out any US tax. But not to the extent of US income, on which no foreign tax credit nor exclusion is available to you in the US . Additionally effective January 1, 2005 there is no longer a 90% limitation on the Alternative Minimum Tax (AMT) FTC. Therefore when in AMT it is now possible to achieve a full US FTC against US income tax and reduce the US tax to NIL.

To qualify for the FEIE you must: 1) have a tax home outside the US for at least 12 full months (any 12), and 2) meet either the Bonfide Residence Test (BFR) or Physical Presence Test (PPT). As long as you do not work directly for the US military, then to qualify for the BFR test you must be outside the US for a full calendar year, while for the PPT test you must have at least the 330 full days of foreign presence in any 365 day period. The BFR is a qualitative test, the PPT a quantitative test.

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6/10/09 - Donna asks:

"Currently, I am paid in Portugal as an employee of a company and taxes are taken out of my earnings here in Portugal. What is my tax implication in the US if I am already paying taxes on income earned here! Also, was advised by US Immigration authority during my last visit a few months ago that because I no longer reside in the USA- more importantly- that I reside in the EU for greater than 183 days per year - that the US no longer considers me to have residency there. By the way, I am a US citizen, born there of US parents."

Marc's reply:

Dear Donna,

As a US citizen/ green card holder you have a US filing obligation on worldwide income for life if your income exceeds the annualized threshold amount - the combination of your exemption and standard deduction. This threshold is typically around $10,000.

However, there are many opportunities to use special exclusions and credits in your case while abroad, but to use them you must first qualify and file a tax return to receive these exclusions and credits.

The foreign earned income exclusion (FEIE) amount 2008 $87,600 (2007- $85,700) - per spouse. The exclusions are NOT available to government wages earned abroad. Effective January 1, 2006 as amended by IRC Sec. 515 of the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) is "Stacking". "Stacking" results in the next dollar of income taxed at a much higher marginal rate of tax, as though it were the $85,701st dollar of income earned.

There is also the foreign housing exclusion (HE) (and deduction (HD) in the case of a self-employed person), which can augment the $87,600 FEIE. New effective January 1, 2006 as amended by IRC Sec. 515 of TIPRA there are two changes regarding the HE and HD: 1) A new base (deductible) amount that has risen and 2) An overall effective cap on the total qualified housing costs eligible for consideration for either the HE or HD, at 30% of the FEIE of $87,600. However further to the ratification of TIPRA, the IRS issued IRS Notice 2006-87- which allows for this cap to be overridden in certain circumstances.

After the two above exclusions are considered should foreign earned or unearned income still exist, a US Foreign Tax Credit (FTC) (i.e.- foreign taxes paid on foreign income, if any), in combination should wipe out any US tax. But not to the extent of US income, on which no foreign tax credit nor exclusion is available to you in the US . Additionally effective January 1, 2005 there is no longer a 90% limitation on the Alternative Minimum Tax (AMT) FTC. Therefore when in AMT it is now possible to achieve a full US FTC against US income tax and reduce the US tax to NIL.

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8/8/09 - CaptAnne asks:

"I have been in Belize 15 years, an hotel owner. Now wishing to sell and return to the US. If we sell here and bring this $ back to the US, is the IRS going to want it?"

Marc's reply:

I believe the more complicated answer to your question is in the past 15 years while living and working abroad have you been US tax compliant? That is filing US tax returns and reporting worldwide income? All US persons have a life long worldwide US filing requirement.

If the answer to the above is affirmative, then you have reported and paid all US income tax and the money is clear and can be brought back to the US with no tax consequences.

If not, then you have far larger issues then the proceeds from the sale of the business.

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27/7/09 - Sir Richard P. asks:

"It would be helpful to include a list of those US States that charge inheritance tax (or equivalent) on the death of an overseas-born resident and those that do not. Could you advise please?"

Marc's reply:

Only the federal US government assesses inheritance tax, which we call estate tax. Further state income or estate tax (if it was applicable) would not apply in the case of a US person living abroad, as they would not have a state residency issue and therefore have no state issues.

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17/7/09 - Barry S. asks:

"I've been told that the US is the only country in the world that taxes its citizens for life - is this true? - whereas other nationals can leave their home countries and break their tax ties? Why is that so and are there any mitigating factors that I need to know?"

Marc's reply:

Yes, in fact the US is the ONLY country in the world to tax its people based upon their citizenship and "legal permanent residence" (or green card) and not based upon their "tax residency". Therefore while a US person is abroad, they continue to be subject to US taxation, in addition to taxation in their new country of residence.

Other countries have a "tax residency" concept, where "tax residency" is severable and determined by a variety of tests or features unique to each country's tax system- e.g.: permanence of stay abroad, personal property & social ties, disposition of spouse, dependents and dwelling, etc....

There are three ways to help avoid double taxation while abroad on assignment. The Foreign Earned Income Exclusion (FEIE), the Foreign Housing Exclusion (HE)- (if employed) or/ and the Foreign Housing Deduction (HD)- (if self-employed), and the Foreign Tax Credit (FTC). Many years ago in an attempt to help mitigate the above double taxation inequity to US persons abroad the US introduced legislation that would give US resident aliens (citizens and green card holders) a break on their income that they earned abroad.

The break is contained in the Internal Revenue Code (IRC) Sec. 911, using IRS Form 2555- Foreign Earned Income Exclusion- (FEIE) currently set at $87,600, which allows US resident aliens the ability once included in their tax return as either wage income or self-employed income, to then exclude up to the first $87,600- for 2008 - of foreign earned income. The exclusion is pro-ratable in partial (non full calendar years) years abroad, based upon the number of days in that calendar year over 365 days.

There are certain tests that must first be met to qualify to claim the exclusion.

In addition to the FEIE there is the Foreign Housing Exclusion (HE) for employed persons or the Foreign Housing Deduction (HD) for self-employed persons, which is an opportunity to augment this basic earned income exclusion by an overseas taxpayer's reasonable qualified foreign housing expenses. Qualified foreign housing expenses are typically much higher than a taxpayer's taxable employer paid housing income/ allowance, or quarters.

When it comes to foreign earned income or non earned income that is not excluded, the remainder under US IRC Sec. 901 and most federally negotiated international income tax treaties, there is another provision to avoid "double taxation". The provision is reportable on IRS Form- 1116- as the "Foreign Tax Credit" (FTC). The FTC is a dollar for dollar reduction of US tax in respect of non excluded foreign tax on non excluded foreign income. In other words, you are NOT allowed to take a FTC credit on income that has already been excluded on Form 2555, IRC Sec. 911 and the amount of foreign tax eligible for the FTC must also be scaled down for excluded income. As a result of the FTC you are always protected and theoretically should NEVER pay double tax on your worldwide income.

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Click here to read an in-depth interview with Marc or click here to submit a question for Marc to answer publicly next month (please note that Marc is only able to answer a selection of questions received but all questions are read and considered.) Alternatively, click here if you would prefer to discuss your individual needs privately or are looking for a specific quote.

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