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Agenda for Class 2 and 3. Open questions from last class Expatriates – understand the special rules and concepts associated with expatriates Taxation of expatriates IRC Sec 911 “Qualified individual” Foreign earned income exclusion and housing exclusion Special IRC Sec 911 restrictions.

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agenda for class 2 and 3
Agenda for Class 2 and 3
  • Open questions from last class
  • Expatriates – understand the special rules and concepts associated with expatriates
    • Taxation of expatriates
    • IRC Sec 911
    • “Qualified individual”
    • Foreign earned income exclusion and housing exclusion
    • Special IRC Sec 911 restrictions
taxation of expatriates
Taxation of Expatriates
  • Taxed on worldwide income
    • IRC Sec 61
    • No provision for earned or paid in the US
  • Provisions to avoid double tax
    • IRC Sec 911
    • Foreign tax credit IRC 901
  • Purpose of IRC Sec 911
  • Intermittent proposals in Congress to eliminate IRC Sec 911
irc sec 911
IRC Sec 911

Sec 911 Citizens or residents of the US living abroad.

  • Exclusion from gross income. At the election of a qualified individual … there shall be excluded from the gross income … the foreign earned income … and the housing cost amount.
  • Who is a qualified individual?
  • What is excluded foreign earned income?
  • What is the housing cost amount?
qualified individual
Qualified Individual

IRC Sec 911(d)(1) Qualified individual. The term “qualified individual” means an individual whose tax home is in a foreign country and who is —

  • a citizen of the US and … has been a bona fide resident of a foreign country … for an uninterrupted period which includes an entire taxable year
tax home irc 1 911 2 b
Tax Home (IRC 1.911-2(b))
  • Same meaning as IRC Sec 162(a)(2) – travel expenses while “away from home”
  • Located at regular/principal place of business
  • Tax home in a foreign country is not restricted by:
    • Temporary presence in US
    • Maintenance of home in US, even if used by spouse and dependents
qualified individual1
Qualified Individual

IRC Sec 911(d)(1) Qualified individual. The term “qualified individual” means an individual whose tax home is in a foreign country and who is —

  • a citizen of the US and … has been a bona fide resident of a foreign country … for an uninterrupted period which includes an entire taxable year
bona fide resident test bfr criteria
Bona fide Resident Test (BFR) Criteria
  • US citizen
    • Resident alien under nondiscrimination clause under treaty

“Nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith that is more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances, particularly with respect to taxation on worldwide income, are or may be subjected.”

    • Rev. Rul. 91-58
      • UK treaty nondiscrimination clause
      • Applicable to 38 other treaties
bona fide resident test bfr criteria1
Bona fide Resident Test (BFR) Criteria
  • Resident in foreign country for entire calendar year
  • Can not claim to be a nonresident of the foreign country (1.911-2(c))
  • If foreign country has an income tax, individual’s earned income must be subject to that tax – does not mean you must pay foreign tax (1.911-2(c))
bfr effective date
BFR Effective Date

Example

  • John arrived in France 1/31/09
  • John in France for 2010
  • John meets BFR test ___________
  • Qualifying period begins ________

When is John’s 2009 tax return due?

Can John spend time in the US in 2010? In 2011?

qualified individual2
Qualified Individual

IRC Sec 911(d)(1) Qualified individual. The term “qualified individual” means an individual whose tax home is in a foreign country and who is —

  • BFR test
  • a citizen or resident of the US and who, during any period of 12 consecutive months, is present in a foreign country or countries during at least 330 full days in such period
physical presence test ppt criteria
Physical Presence Test (PPT) Criteria
  • US citizen or resident alien of the US
  • Individuals with valid IRC Sec 6013(g) or (h) election
    • 6013(g) NRA elects to be treated as resident
    • 6013(h) joint return for year NRA becomes resident
  • Tax home in foreign country
  • Physically present for at least 330 full days during 12 consecutive months
  • Full day – 24 hours 1.911-2(d)(2)
ppt calculation year of expatriation
PPT Calculation – Year of Expatriation
  • Count days beginning with first full foreign day on assignment and count forward
  • Exclude days spent in US
  • Include days spent in other countries
  • Foreign days prior to assignment do not count
  • Slide rule – once 330 days reached, determine start of qualifying period by counting back 365 days
slide rule
Slide Rule
  • Joe left the US on 3/31/08, arrived in UK 4/1/08
  • Remains in UK through 4/20/09
  • Meets PPT
  • What is start of period?

2/25/09

330th Qualifying Day

4/2/08

First Qualifying Day

2/26/08

Beg of 12 Mo Period

2/25/09

330th Qualifying Day

slide rule1
Slide Rule
  • Art left the US on 6/1/08, arrived in Germany 6/2/08
  • Remains in Germany through 10/31/09
  • Meets PPT?
  • What is start of period?
ppt calculation year of repatriation
PPT Calculation – Year of Repatriation
  • Count days beginning with last full foreign day on assignment and count backward
  • Exclude days spent in US
  • Include days spent in other countries
  • Foreign days after assignment do not count
  • Slide rule – once 330 days reached, determine end of qualifying period by counting forward 365 days
handout
Handout
  • BFR
    • Tax home in foreign country
    • Bona fide foreign residence
    • Entire taxable year
  • PPT
    • Tax home in a foreign country
    • 330 days out of 12 consecutive months
waiver of period of stay
Waiver of Period of Stay
  • IRC Sec 911(d)(4) treated as meeting BFR and PPT if
  • Required to leave because of war, civil unrest, or similar adverse conditions
  • Would have met requirements but for the conditions above
  • Prorated for days in the country
irc sec 9111
IRC Sec 911

Sec 911 Citizens or residents of the US living abroad.

  • Exclusion from gross income. At the election of a qualified individual … there shall be excluded from the gross income … the foreign earned income … and the housing cost amount.
  • Who is a qualified individual?
  • What is excluded foreign earned income?
  • What is the housing cost amount?
foreign earned income
Foreign Earned Income
  • Earned income attributable to services performed during BFR or PPT period (IRC Section 911(b)(1)(A)
    • Tax home must be abroad
    • Work performed in US excluded
    • Location where services rendered vs. payment made
  • Includes
    • Wages, salaries, professional fees
    • Overseas allowances and reimbursements
    • Cash and non-cash amounts
foreign earned income1
Foreign Earned Income
  • Excludes
    • Pensions and annuities (IRC Sec 911(b)(1)(B)
    • Paid by the US government or agency thereof
    • Received after the close of the tax year following the taxable year in which the service to which the amounts are attributable are performed

Example:

  • Bonus for 2008
  • Paid in 2010
  • Qualifies for exclusion?
sourcing irc reg 1 861 4
Sourcing IRC Reg 1.861-4
  • Effective 1/1/06
  • Compensation – sourced on basis that reflects facts and circumstances
    • Time basis
    • # of work days within US

total workdays

    • Units of less than a day may be appropriate
  • Multi-year compensation
    • Time basis over the period to which such compensation is attributable
    • Stock options: use period between date of grant and date of vest
sourcing irc reg 1 861 41
Sourcing IRC Reg 1.861-4
  • Fringe benefits sourced on geographic basis
    • Housing: principal place of work
    • Education: principal place of work
    • Local transportation: principal place of work
    • Tax reimbursement: jurisdiction that imposed tax
    • Hardship pay: location of hazardous duty
    • Moving expense reimbursement: based on location of new principal place of work
sourcing compensation
Sourcing Compensation
  • Sourced on workdays
    • Salary
    • 401(k)
    • Goods and services differential
  • Attributed to specific services
    • Bonus
  • Attributed to specific location
    • Education allowances
    • Foreign taxes
    • Housing
    • Language training
foreign earned income exclusion
Foreign Earned Income Exclusion
  • Lesser of foreign earned income or $91,400 for 2009 and $91,500 for 2010 (ratably allocated for transfer years)
    • Prior law (2002 – 2005) $80,000 exclusion; $82,400 for 2006; $85,700 for 2007; $87,600 for 2008.
    • Adjusted for inflation in future years
    • Each working spouse has separate exclusion
    • Ignore community property IRC Sec 911(b)(2)(C)
    • Attributed to year services performed IRC Sec 911(b)(2)(B)
  • If max exclusion exceeds foreign earned income, unused exclusion can be carried forward one year
slide rule2
Slide Rule
  • Joe left the US on 3/31/08, arrived in UK 4/1/08
  • Remains in UK through 4/20/09
  • Meets PPT
  • What is start of period?

2/25/09

330th Qualifying Day

4/2/08

First Qualifying Day

2/26/08

Beg of 12 Mo Period

2/25/09

330th Qualifying Day

foreign earned income exclusion1
Foreign Earned Income Exclusion
  • 2/26/08 beginning of qualifying period
  • Annual exclusion is pro-rated if taxpayer did not qualify for entire year

(# of qualifying days in tax yr) x maximum

(total # of days in tax yr exclusion

irc sec 9112
IRC Sec 911

Sec 911 Citizens or residents of the US living abroad.

  • Exclusion from gross income. At the election of a qualified individual … there shall be excluded from the gross income … the foreign earned income … and the housing cost amount.
  • Who is a qualified individual?
  • What is excluded foreign earned income?
  • What is the housing cost amount?
housing exclusion
Housing Exclusion
  • Housing cost in excess of government-set based housing amount (16% of the exclusion = $14,624 in 2009) (IRC Sec 911(c)(1))
  • Housing cost limited (Sec 911(c)(2))
    • 30% of foreign earned income exclusion
    • High cost locations
    • Notice 2008-107 and 2010-27
    • Allowed to use 2008 or 2010 limitation for 2009
  • Housing exclusion claimed before foreign earned income exclusion
housing exclusion1
Housing Exclusion
  • Allowable housing costs
    • House/apartment rental
    • Fair rental value of company-owned housing
    • Utility expenses (excluding telephone and cable)
    • Cost of household repairs, no capital expenditures
    • Real and personal property insurance
    • Occupancy tax
    • Cost of renting (but not purchasing) furniture and accessories)
    • Charges for residential parking
  • Reasonable costs vs. lavish and extravagant
housing exclusion2
Housing Exclusion
  • Annual exclusion is pro-rated

# of qualifying days x base housing amount

Total days in year

  • Excess costs can’t be carried over to future years
  • Claimed before foreign earned income exclusion
housing deduction
Housing Deduction
  • Available for self-employed
  • Housing costs in excess of base
    • Limited to 30% of foreign earned income exclusion
    • High cost locations
  • Deduction rather than exclusion
  • Claimed after foreign earned income
  • Excess costs can be carried forward 1 year
irc sec 911 restrictions
IRC Sec 911 Restrictions
  • Denial of double benefits 911(d)(6)
    • Foreign tax credit
    • Moving expenses
  • Income earned in restricted country 911(d)(8)
    • Income from sources excluded from “foreign earned income” definition
    • Housing in such country excluded from “housing expenses” definition
electing irc sec 911 exclusions
Electing IRC Sec 911 Exclusions
  • Election made by claiming exclusion on Form 2555
  • Remains in effect for all subsequent years unless revoked
  • Revoke election by filing a statement with the tax return
  • Can’t make new election before 6th taxable year (unless get permission of Commissioner)
electing irc sec 911 exclusions1
Electing IRC Sec 911 Exclusions
  • Election made with original return or amended return for the first taxable year in which the election is to be effective
    • Must be made on timely filed tax return or
    • Amended return within period prescribed in IRC 6511 or
    • Original return filed within 1 year after due date of original return or
    • “Filed pursuant to Sec 1.911-7(a)(2)(i)(D)”
      • Owes no tax
      • Owes tax, but before IRS discovers
tax calculation
Tax Calculation
  • Effective tax years beginning 1/1/06
  • Income in excess of the exclusion is taxed as though the exclusion did not apply – stacking rule

$80,000 foreign earned income

$20,000 other taxable income

Tax on $100,000 – Tax on $80,000 = Tax on $20,000 other taxable income

returns and extensions
Returns and Extensions
  • Can’t claim 911 exclusion until taxpayer has qualified for the exclusion
  • Extend 1040 until you qualify
  • Form 2350 filed with

IRS

Austin, TX 73301-0215

key points
Key Points
  • Taxation of expatriates – IRC Sec 911
  • Are you a qualified individual?
    • Where is your tax home?
    • Do you meet the requirements of BFR or PPT?
  • What is your foreign earned income exclusion and housing exclusion?
    • Is it attributed to foreign workday?
    • How is it calculated?
  • How do you make the election?
  • How do you calculate your tax?
contact information
Contact Information
  • Carol Rutlen

crutlen@rutlen.com

650-321-3999