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FAQs
Q: I am working overseas. Do I have to file a tax return with the IRS?
Q: What is foreign earned income?
Q: I have to pay taxes to the foreign country where I am residing. Am I taxed twice?
Q: I am receiving foreign social security benefits and a pension from my former employer in a foreign country. How are these benefits taxed by the U.S. and the other country?
Q: I am living overseas and am self-employed. Do I have to pay U.S. social security tax on my business income?
Q: I have been living overseas for the last five years and haven't filed any tax returns during that time. I would like to get caught up. Can I still claim the foreign earned income exclusion on my foreign salary?
Q: I am a resident alien working in the U.S. and hold a H1B visa. I will be returning to my home country later this year. I have some qualified and nonqualified stock options that I have not yet exercised, and the difference between my exercise price and the current market value is quite substantial. I don't know whether I should exercise my options before of after I leave the U.S. Is there advance planning I can do to reduce how much tax I have to pay to the U.S. and my home country on the exercise of these options and the eventual sale of the stock?
Q. I moved from Canada to work in the U.S. I still have a Canadian RRSP in place. Do I need to report anything about the RRSP to the Internal Revenue Service? What if I take a distribution from the RRSP? Will I be taxed by both Canada and the U.S.?
Q: I am working overseas. Do I have to file a tax return with the IRS?
A: Yes, if you are a U.S. citizen or a resident alien (a "green card" holder),
you must annually file a federal tax return and report all of your income,
no matter where you earned it. On your 2008 federal tax return you can exclude up to $87,600 of foreign earned income if you meet certain foreign presence tests. This exclusion
(called the section 911 benefit) is also available to a spouse if he or
she also works outside the U.S. and meets all the requirements of section
911. I have many clients who work outside the U.S., and I can help you too.
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Q: What is foreign earned income?
A: Generally, it is income you earn from the performance of personal services outside the U.S. and its territories and possessions. Included are salaries, wages, commissions, fringe benefits, self-employed business income, etc. Salaries earned from employment with the U.S. government or its agencies is not foreign income, although it is earned income.
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Q: I have to pay taxes to the foreign country where I am residing. Am I taxed twice?
A: No. Federal tax law allows you to claim a foreign tax credit for taxes paid to another country on foreign-sourced income that is also taxed by the U.S. If the income is derived from U.S. sources, the other country would usually have to provide the tax relief by granting you a credit or deduction for taxes paid to the U.S. The law is quite complex, so you should seek competent assistance to claim this valuable credit. One of the services I offer is helping clients keep their worldwide tax burdens to the lowest possible level.
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Q: I am receiving foreign social security benefits and a pension from my former employer in a foreign country. How are these benefits taxed by the U.S. and the other country?
A: Generally, if you are a U.S. citizen or a resident alien you are taxed on your worldwide income by the U.S. However, if the U.S. has an income tax treaty in force with the other country these benefits may be taxed by either or both countries. If the treaty permits both countries to tax the benefits, the U.S. will grant relief from double taxation by allowing you to claim a foreign tax credit.
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Q: I am living overseas and am self-employed. Do I have to pay U.S. social security tax on my business income?
A: You would be required to pay the self-employment tax unless you are required to pay social security taxes on this income to the country in which you are residing. The U.S. has social security totalization agreements with several countries which eliminate double social security taxation. You can get more information about these agreements by going to the Social Security Administration's website at http://www.ssa.gov. Click on the section dealing with international benefits.
If you pay social security tax to a country that does not have a totalization agreement in place with the U.S. you will still need to pay social security tax to the U.S. on your self-employment income. However, you will be eligible to claim a foreign tax credit on your U.S. tax return for the social security tax you paid to the other country.
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Q: I have been living overseas for the last five years and haven't filed any tax returns during that time. I would like to get caught up. Can I still claim the foreign earned income exclusion on my foreign salary?
A: Generally, a taxpayer must elect the benefits of section 911 within one year of the original due date (not including extensions) of the tax return. However, IRS has provided, in the regulations, a way to make a late election so taxpayers like yourself can get back into the U.S. tax system. I can prepare the past due tax returns for you using the procedure set forth by the IRS.
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Q: I am a resident alien working in the U.S. and hold a H1B visa. I will be returning to my home country later this year. I have some qualified and nonqualified stock options that I have not yet exercised, and the difference between my exercise price and the current market value is quite substantial. I don't know whether I should exercise my options before of after I leave the U.S. Is there advance planning I can do to reduce how much tax I have to pay to the U.S. and my home country on the exercise of these options and the eventual sale of the stock?
A: Yes, you may have some opportunities available for taking advantage of differences in tax laws between the U.S. and your home country as to what income is recognized and when it is recognized. However, your U.S. employer will include the "bargain element" of your nonqualified options as compensation on your W-2 Form, even if you exercise the options after departing the U.S. Some of this compensation may be deemed to be foreign-sourced income if you had performed services for your employer outside the U.S. during the vesting period of the option. Since foreign-sourced income is generally not taxed to a nonresident alien, you may be able to reduce your U.S. tax if you wait until after you give up your U.S. residency to exercise the option.
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Q: I moved from Canada to work in the U.S. I still have a Canadian RRSP in place. Do I need to report anything about the RRSP to the Internal Revenue Service? What if I take a distribution from the RRSP? Will I be taxed by both Canada and the U.S.?
A: Yes, you are required to report the existence of the RRSP to IRS and possibly to the U.S. State where you currently reside. You can attach to your timely-filed U.S. tax return an election to defer U.S. taxation on the earnings in the RRSP until you take a distribution from the plan and Canada assesses its 25% Part XIII tax. The election is made in accordance with Revenue Procedure 2002-23 by annually attaching to your federal tax return a Form 8891 for each RRSP or RRIF you own. If you do not make the election on a timely-filed tax return, you are required to report the RRSP on Form 3520 or 3520-A, since it is deemed to be a foreign grantor trust.
If you take a distribution from the RRSP, the U.S. will grant you a foreign tax credit for the Canadian tax withheld from the distribution. In addition, the U.S. provides you with a cost basis equal to the original contributions you made to the plan (after converting the Canadian-dollar amounts to U.S. dollars using historical exchange rates for the years you made the contributions). Only your "profit" from the plan will be subject to U.S. tax. Because of the foreign tax credit and the allowed cost basis (which is essentially your investment in the RRSP), you probably will pay little or no U.S. tax on the distribution. State taxation of the distribution will depend on the laws of the State in which you reside.
These same rules apply to U.S. citizens and permanent resident aliens ("green card" holders) who are working in Canada and contributing to RRSPs.
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