US taxes on foreign income

Factual Questions
1

A simple request for some tax information minus all the legalese and financial gibberish on the IRS’s website.

I’m an American citizen. May and June of this past year I was living in Ireland and working - not much but I did get a paycheck. Then I moved to London, and from July through November, worked for two different companies in the UK. In the UK I was tax-exempt, as for some students, if you earn less than a certain amount, you don’t pay UK taxes (though the NI tax is still deducted*).

So in a month or two I’m going to start trying to do my taxes. Will I owe the IRS money from what I earned overseas? Will I need extra forms to declare what I earned abroad? If I will be taxed on it, how much?

Taxes are scary things and, during my brief stint early last year doing data entry for the IRS, they permanently drilled it into my head not to screw up on my taxes.

*I think that, technically, the NI deduction doesn’t count as a tax. But I in no way benefited from it, as, not being British, I wasn’t covered at all by the NHS, so I’m bitter about that. Grumble.

2

You are required to report foreign earned income to the IRS. First complete Form 2555: Foreign Earned Income (PDF), then transfer the final amount to your 1040 form.

Publication 54: Tax Guide for U.S. Citizens and Resident Aliens Abroad.

3

Instructions for Form 2555: Forieng Earned Income. (PDF)

4

I’ll echo Walloon: as a U.S. citizen, you are liable for U.S. tax on all income, regardless of where it was earned.

There are, however, a number of complications that can arise. If you paid any income tax to a foreign government (U.K. or Ireland in your case), you can get credit against U.S. tax for the taxes you paid (to avoid double taxation.) And some forms of foreign income are not taxed in the U.S., although they have to be reported. There’s possibly more than just the regulations, there are tax treaties between the U.S. and both the U.K. and Ireland that can provide you with significant tax breaks.

My suggestion would be that you might first make a stab at doing it yourself, but it might be worth the cost of expert help. And “expert help” means someone who actually knows this stuff, not just walking into an H&R Block (or equivalent) and paying for some twerp who doesn’t know more than you do.

5

Some countries have an agreement worked out with the US, where if you are paying taxes in that country as a resident of that country, you get an exemption on your American taxes. You still have to file a return and report how much you earned, however, and not all countries have this agreement. Also, the exemption only covers income up to a certain amount (somewhere in the neighborhood of US$90,000). I assume that this agreement also covers citizens of those countries living in America wrt their home taxes.

6

I might do this, if I can find someone affordable to help me out. Taking a brief look at the forms and such yields lots of fine-print and "Wait, what?"s, more than answers.

Thanks for the info, though.

7

oooohh …scary…be careful, or you’ll go to jail …

Relax–there’s an easy answer, and it won’t cost you anything, anyway.

You fill out a simple form, called Form 2555, or its even simpler , easier little brother form called Form255EZ. Then you fill out your regular 1040, and SUBTRACT the money listed on 2555 from your total income.

Uncle Sam taxes you on all the money you make–it doesn’t matter if you recieved it in the form of a salary in US dollars, or salary in Euros, or as stock options, or as a lump of gold bullion, or as unmarked bills in a suitcase from a guy name Luigi. You have to add it all up and report it as income.

But if you received the money in a foreign country and paid taxes on it to that country, you don’t have to pay more tax on it to the USA. So you list it on form 2555, and subtract that amount from your total income.

Form 2555 basically consists of only one line , where you write down how much you received from foreign employers. You don’t have to attach any documentation. The IRS takes your word for it,( because they can’t really check up on you anyway, I suppose.)

Just read the instructions that come with form 2555, and follow the examples.
You won’t have any problems.

(standard disclaimer: don’t listen to me–I am not your lawyer, your accountant, your real estate agent , or your proctologist)

8

What portion of 2006 in any arbitrary period of 365 days that occurred at least partially in 2006? That’s all proportionally deductible up to US$85,000 or so. Check the IRS site for bona fide foreign residence and stuff like that.

9

I’m sorry, I don’t speak Tax. Translation, please?

10

Yellow card! Accidential mistakes on tax forms do not result in jail time, nor does a tax burden that drives you into bankrupcy.

Lying on tax forms is a separate problem.

Check with the IRS publications, previous opinions, private letter rulings as necessary, and professional tax advisers.

Rough translation of what Balthisar said: If you lived out of the USA for part of 2006, you may have an exemption or deduction for the appropriate fraction of $85,000. (However, I have no idea what this exemption/deduction may be, or where to report it. IRS Pub. 54 probably has the info.)

11

Sorry. It’s like this. Tax Year 2006 consists of 365 days from 01-Jan through 31-Dec. You may have been out of the country from, say, 01-Oct-2005 through 30-Aug-2006. That period being out of the country is 334 days. At 330 days, you qualify as being out of the country. (Of course you can’t overlap that “out-of-country-time” with other out-of-country-times for other tax years.) For your tax year 2006, then, you have 242 days that qualify for exemption (out of the 365 potential days and 330 day minimum). So if the limit is $80,000, then proportionally you are able to exempt just over $53,000 of your 2006 income. My numbers are quickies – seriously, check out the IRS pubs to see your potential tax savings. Note that it’s not dependant on paying foreign taxes. If you’re in a country that gives foreign workers tax breaks, you could be virtually scott free. Maybe Paul In Saudi has something like this, because I always hear about “work tax free in Saudi Arabia” deals.