I am planning to teach abroad during the school year but return home to the US during summer and Christmas breaks. This situation was discussed in previous threads and some advice was given that one must meet the "physical presence test" (330 day rule) the first year abroad and then after that the "bona fide resident" test is available. From reading the IRS website, it seems like you could do the bona fide resident test the first year and not have to worry about counting days in the US your first year. (I'm not so worried about the August to December of the first year.) The problem is that that IRS is a little vague about how to qualify as a bona fide resident of a foreign country. The paragraph below is copy/pasted from their website:
Determination
Questions of bona fide residence are determined on a case-by-case basis, taking into account such factors as your intention or the purpose of your trip and the nature and length of your stay abroad. You must show the Internal Revenue Service (IRS) that you have been a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. 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.
Here are my questions:
1) Has anyone filed Form 2555 (after spending summers in the US) and gotten approval? It sounds like there's no way to know for sure if you qualify until you file that form, but at that point it would be too late to try to meet the 330 day rule, leaving you on the hook for US income taxes.
2) Has anyone been audited and had issues with the amount of time you spend in the US as an IT? It does say you have to be a bona fide resident of the foreign country for an uninterrupted tax year. My interpretation is that going home over the summer doesn't change the fact that you are a bona fide resident of your foreign country since you plan to return after your vacation is over, but I worry that the IRS wouldn't see it that way.
3) Is anyone aware of any implications of new tax code will have that specifically affect expats/ITs?
Bona Fide Resident for US Income Tax Purposes
Response
The bonafide presence test is a discretionary case by case option. It works for expats who have spent a full tax year abroad, but then have returned to the US periodically after that, such as ITs who spend summers in excess of a month in the US.
The physical presence option is a strict metric, you spend 330 days youre a foreign resident, its very clean.
The physical presence test can be met by applying for an extension your first year allowing you to get to the 330 days needed for the physical presence requirement. This loophole is likely to be closed in the future, but the option to define your tax year differently than Jan 1 will still be an option as long as you have no tax liability.
You are correct there is no way to get a preliminary evaluation prior to filing a 2555, and once you file it you cant withdraw it. You can however file and then amend your filing.
The IRS may or may not see your summer holidays in the US as an interruption or not, in the vast majority of cases they do not interpret it as an interruption of foreign residence. In the cases where it was seen as an interruption the ITs engaged in summer employment (IE. summer camp) or had business ventures (rental property, small business income) they conducted while in the US over the summer holiday.
I would consider ignoring your taxes your first year, your writing a book or traveling overseas or something else that doesnt generate income, than start filing after that first year. The IRS doesnt care about you and your salary they care about people attempting to hide vast taxable sums.
The physical presence option is a strict metric, you spend 330 days youre a foreign resident, its very clean.
The physical presence test can be met by applying for an extension your first year allowing you to get to the 330 days needed for the physical presence requirement. This loophole is likely to be closed in the future, but the option to define your tax year differently than Jan 1 will still be an option as long as you have no tax liability.
You are correct there is no way to get a preliminary evaluation prior to filing a 2555, and once you file it you cant withdraw it. You can however file and then amend your filing.
The IRS may or may not see your summer holidays in the US as an interruption or not, in the vast majority of cases they do not interpret it as an interruption of foreign residence. In the cases where it was seen as an interruption the ITs engaged in summer employment (IE. summer camp) or had business ventures (rental property, small business income) they conducted while in the US over the summer holiday.
I would consider ignoring your taxes your first year, your writing a book or traveling overseas or something else that doesnt generate income, than start filing after that first year. The IRS doesnt care about you and your salary they care about people attempting to hide vast taxable sums.
Re: Bona Fide Resident for US Income Tax Purposes
Note the bit about “uninterrupted period that includes an entire tax year”. That’s the sticking point, at least in Aug-June schools. If you join a Jan-Dec school, it’ll be possible.
It’s just the first year that’s 330. Easy to handle, and after that no issues.
It’s just the first year that’s 330. Easy to handle, and after that no issues.
-
shopaholic
- Posts: 82
- Joined: Fri Jan 20, 2017 11:42 pm
Re: Bona Fide Resident for US Income Tax Purposes
I haven't left Europe in 4 years, but the organization that prepares my tax docs informed me that I'm not going to be classified as a "bona fide" resident for US income tax purposes.
-
wrldtrvlr123
- Posts: 1173
- Joined: Sat Feb 06, 2010 10:59 am
- Location: Japan
Re: Bona Fide Resident for US Income Tax Purposes
We've moved overseas twice and both times used the method PG just posted about, filing for an extension(s) and then going the bonafide residence route. We've also always filed using Turbo-tax and never had any issues.
In the past there was also an option for a pro-rated exclusion which would cover most int'l teachers earnings abroad from the 2nd half of that 1st year overseas.
In the past there was also an option for a pro-rated exclusion which would cover most int'l teachers earnings abroad from the 2nd half of that 1st year overseas.
Re: Bona Fide Resident for US Income Tax Purposes
I don't understand how an extension would help, because the rules say that you have to be out of the country for 330 days during any 365 day period. I see that you could start your 330 days on August 1 rather than January 1, but that doesn't change the fact that summer + Christmas break would be well over 35 days.
It's funny that you mention issues coming up with people working at a summer camp in the US, because that's exactly what I planned to do during the summer. It's also the reason I don't want to just stay out of the country for a few extra weeks over the summer to meet the 330 day rule. You can't get a summer job if you are only able to work for 35 days. I know I would have to pay US taxes on the summer camp income (and I know that I would have to pay it at the rate it would be without the FEIE - i.e. if you earn 50,000 from your IS and $5,000 from the summer camp, you have to pay the taxes on the $5000 as if that income fell in the $55,000 tax bracket rather than the $5000 tax bracket). I'm not worried about that. I'm worried about having to pay taxes on the income from the IS.
It's funny that you mention issues coming up with people working at a summer camp in the US, because that's exactly what I planned to do during the summer. It's also the reason I don't want to just stay out of the country for a few extra weeks over the summer to meet the 330 day rule. You can't get a summer job if you are only able to work for 35 days. I know I would have to pay US taxes on the summer camp income (and I know that I would have to pay it at the rate it would be without the FEIE - i.e. if you earn 50,000 from your IS and $5,000 from the summer camp, you have to pay the taxes on the $5000 as if that income fell in the $55,000 tax bracket rather than the $5000 tax bracket). I'm not worried about that. I'm worried about having to pay taxes on the income from the IS.
-
wrldtrvlr123
- Posts: 1173
- Joined: Sat Feb 06, 2010 10:59 am
- Location: Japan
Re: Bona Fide Resident for US Income Tax Purposes
The nice thing about the bonofide method is that it is based on you being a bonofide resident of the overseas country (e.g. set up a household, have full time employment, are subject to local taxes, etc) for a full year, NOT necessarily being physically in that country for the entire year (from my recall.understanding).
As I recall, the IRS specifically states that you can make brief trips out of the country and even back to the US during that year and still qualify for the bonofide resident (and doesn't really refer to the same 330 days as stipulated in the physical presence test).
It is individually determined and there is some risk that they could deny it, but generally it seems fairly straightforward if you go to the country to take up a job that is not temporary or of fixed duration (as in you know it is only for 1 year per contract and then the job ends as opposed to a 2 year renewable contract)), you set up a household, have a bank account, pay local taxes (or have not claimed your are exempt from them), etc.
I am not certain how a summer job in the US would affect that and you should probably seek clarification from the IRS about that (we never earned any money in the US after we left).
As I recall, the IRS specifically states that you can make brief trips out of the country and even back to the US during that year and still qualify for the bonofide resident (and doesn't really refer to the same 330 days as stipulated in the physical presence test).
It is individually determined and there is some risk that they could deny it, but generally it seems fairly straightforward if you go to the country to take up a job that is not temporary or of fixed duration (as in you know it is only for 1 year per contract and then the job ends as opposed to a 2 year renewable contract)), you set up a household, have a bank account, pay local taxes (or have not claimed your are exempt from them), etc.
I am not certain how a summer job in the US would affect that and you should probably seek clarification from the IRS about that (we never earned any money in the US after we left).
Re: Bona Fide Resident for US Income Tax Purposes
The tax exclusion is meant for people who are well and truly NOT living in the US. The exclusion is great, but they’re not offering it for nothing. You have to meet the requirements. If you want to live and work summers in the US, it’s not for you.
Re: Bona Fide Resident for US Income Tax Purposes
Thanks for the advice. Based on my interpretation of what I've read on the IRS website and researched elsewhere, I feel that my / our situation as ITs should pass the Bona Fide Resident test, but of course the IRS may see it differently. It's always going to be a gray area, which is why I'm really looking to see if anyone in a similar situation has filed the Form 2555 and what the response was. It clearly says that decisions are made on a case-by-case basis, but do you think that means they actually look at each case independently or they just take your word for it unless you get audited?
Reply
@Teach1010
For the bonafide residence test its more a "guideline" than a rule (unlike the 330 day rule, which is pretty much a firm metric). Thery arent interested in you, an IT who has a foreign residence, a foreign bank account and a job that involves working for other people. They are looking for people with independent wealth who are trying to use extended travel as a means of avoiding to pay taxes.
Its only the first year that the 330 day requirement applies after that as long as you can demonstrate your continued intent to reside abroad, how long you return to the US is no longer relevant. I know an IT after 4 years in IE who had to return for almost 6months to resolve a death in the family, and they were still able to claim foreign bonafide residence. Another IT returned to the US for about 5 months for maternity medical care for her child, still qualified for the credit under bonafide residence.
Thats why the extension works, even if you didnt qualify for the credit, the filer probably qualifies for the deduction or the exclusion, and its not worth going through the work and resources to capture a very small amount of coin even if its determined that tax is due.
Summer camp will be a problem, your returning to the US for employment. You will thus never meet the requirements for the credit. Its possible you could qualify still for the deduction or exclusion. As such with USD$50K in IT salary and another USD$5K in domestic salary, that summer camp job will basically be volunteer if not you paying to volunteer, as your tax liability will exceed your camp salary. You will have to determine at some point if it makes fiscal sense to continue doing that long term (assuming you want to be honest about everything). Also understand that the IRS considers your housing and tuition waivers and other coin equivalent benefits as taxable income.
Its a discretionary test. When you file it gets flagged and a human examiner gives it brief review (some get more scrutiny than others). Many ITs dont have a problem, some ITs do. The ones that do, generally have some kind of business relationship in the US that generates income (in your case summer camp employment). There are some ways around it, but they are mostly complicated (the exception being not to declare your foreign income, or under report it so that you beat the tax liability ). The summary review isnt nearly or anything close to the level of scrutiny close to an audit. Having been audited while in IE as an expat, the audit amounts to:
IRS: "please send us more documents"
PsyGuy: "sorry I cant"
IRS: "okay, thank you, enjoy living abroad"
They have to have something to audit from which to make a determination that a sufficient recovery will justify the cost of pursuing it and the vast majority of ITs have incomes that are entirely exclusionary one route or another and unlike domestic employment they dont get W-2/W-4 and 1099 filing from employers and financial institutions to determine whether there is a case with anything worth collecting.
For the bonafide residence test its more a "guideline" than a rule (unlike the 330 day rule, which is pretty much a firm metric). Thery arent interested in you, an IT who has a foreign residence, a foreign bank account and a job that involves working for other people. They are looking for people with independent wealth who are trying to use extended travel as a means of avoiding to pay taxes.
Its only the first year that the 330 day requirement applies after that as long as you can demonstrate your continued intent to reside abroad, how long you return to the US is no longer relevant. I know an IT after 4 years in IE who had to return for almost 6months to resolve a death in the family, and they were still able to claim foreign bonafide residence. Another IT returned to the US for about 5 months for maternity medical care for her child, still qualified for the credit under bonafide residence.
Thats why the extension works, even if you didnt qualify for the credit, the filer probably qualifies for the deduction or the exclusion, and its not worth going through the work and resources to capture a very small amount of coin even if its determined that tax is due.
Summer camp will be a problem, your returning to the US for employment. You will thus never meet the requirements for the credit. Its possible you could qualify still for the deduction or exclusion. As such with USD$50K in IT salary and another USD$5K in domestic salary, that summer camp job will basically be volunteer if not you paying to volunteer, as your tax liability will exceed your camp salary. You will have to determine at some point if it makes fiscal sense to continue doing that long term (assuming you want to be honest about everything). Also understand that the IRS considers your housing and tuition waivers and other coin equivalent benefits as taxable income.
Its a discretionary test. When you file it gets flagged and a human examiner gives it brief review (some get more scrutiny than others). Many ITs dont have a problem, some ITs do. The ones that do, generally have some kind of business relationship in the US that generates income (in your case summer camp employment). There are some ways around it, but they are mostly complicated (the exception being not to declare your foreign income, or under report it so that you beat the tax liability ). The summary review isnt nearly or anything close to the level of scrutiny close to an audit. Having been audited while in IE as an expat, the audit amounts to:
IRS: "please send us more documents"
PsyGuy: "sorry I cant"
IRS: "okay, thank you, enjoy living abroad"
They have to have something to audit from which to make a determination that a sufficient recovery will justify the cost of pursuing it and the vast majority of ITs have incomes that are entirely exclusionary one route or another and unlike domestic employment they dont get W-2/W-4 and 1099 filing from employers and financial institutions to determine whether there is a case with anything worth collecting.