Excluding Foreign Income On Which Taxes Paid

[MGAP]

I am filing for U.S. income taxes for year 2001.

I am a U.S. citizen who was a resident of a foreign country between 1993
and 2001.

In that year (end of June 2001), I was forced by the State Department to
return to the United States (to pay a legal debt), and became a resident
once again of the United States.

In the first half of 2001, I earned about $4950 in the foreign country,
paying $550 in foreign income tax (not total taxes, just tax called an
"income tax").

In the last half of 2001 as a U.S. resident, I earned only $1975 and paid
$25 in federal withholding and nothing in state withholding.

The question is whether I can use Form 2555 (or its variants) to exclude
the $4950. There are several tests that qualify a U.S. citizen taxpayer
for excluding this income.

One is the physical presence test. I don't think I meet that since I did
not live abroad more than 6 months.

The other is the bona fide residence test. For more than 8 years, I was
truly living abroad and earning all income abroad. Indeed, I only
visited the United States once (for about a month) in one year that I was
there. So for 2001, am I a bona fide resident of the foreign country, or
of the U.S.

The next test is the tax home test. If you change your tax homes in the
middle of a tax year, who has the larger claim?

I'd appreciate some opinions on this.

I can probably complete Form 1116, but that is a weaker claim to the
exclusion of income taxes paid, and does not acknowledge that I really
was a resident of a foreign country during the first half of the year,
and changed residence (or did I??) in the latter half.

 

[Arthur L. Rubin]

I am filing for U.S. income taxes for year 2001.

I am a U.S. citizen who was a resident of a foreign country between 1993
and 2001.

In that year (end of June 2001), I was forced by the State Department to
return to the United States (to pay a legal debt), and became a resident
once again of the United States.

In the first half of 2001, I earned about $4950 in the foreign country,
paying $550 in foreign income tax (not total taxes, just tax called an
"income tax").

In the last half of 2001 as a U.S. resident, I earned only $1975 and paid
$25 in federal withholding and nothing in state withholding.

The question is whether I can use Form 2555 (or its variants) to exclude
the $4950. There are several tests that qualify a U.S. citizen taxpayer
for excluding this income.

One is the physical presence test. I don't think I meet that since I did
not live abroad more than 6 months.

No, actually, the physical presence test can be met for any year, not
necessarily aligning with the calendar year, allowing for a prorated
exclusion. See publication 54 for details.

The other is the bona fide residence test. For more than 8 years, I was
truly living abroad and earning all income abroad. Indeed, I only
visited the United States once (for about a month) in one year that I was
there. So for 2001, am I a bona fide resident of the foreign country, or
of the U.S.

That's a tax year test, but, if you were a bona fide resident in 2000,
that
carries over through June 2001, as well, so you could claim a prorated
exclusion there, as well. See publication 54, again.

The next test is the tax home test. If you change your tax homes in the
middle of a tax year, who has the larger claim?

If your tax home was EVER in the foreign country, you can prorate that,
as well.

I'd appreciate some opinions on this.

I can probably complete Form 1116, but that is a weaker claim to the
exclusion of income taxes paid, and does not acknowledge that I really
was a resident of a foreign country during the first half of the year,
and changed residence (or did I??) in the latter half.

I'd say your tax home was probably in the United States for the latter
half of the year, even if your "residence" didn't change....

HOWEVER, the 2555 can generally only be filed on (1) a timely
filed return (including extensions); (2) an amendment of a
timely filed return; or (3) A return filed within one year
of the original due date of the return (NOT including extensions).

Additional times you could take the exclusion would be if
(4) you owe no Federal income tax after taking into account
the exclusion -- which seems to apply.

In fact, if your numbers are complete, your total income
would be $6925, which is less than the $7450 required to
file a return, so you might not even need the 2555 in
order to get a refund of your $25 withholding.

(It should also be pointed out that your foreign income
is NOT excluded for State income tax purposes, and you
might need to file a part-year resident State income
tax return for the US state you resided in or worked
in in 2001.)