Form 673: Claiming Exemption From Withholding on Foreign Earned Income

What is Form 673?

First of all - Form 673 is a powerful tool that can help US expats save money on their taxes.

It is a form provided by the IRS that allows US citizens and resident aliens who are working abroad to claim an exemption from withholding taxes on foreign earned income.

This means that by filling out Form 673, you can reduce your taxes on your foreign income and take home more of your hard-earned money.

NOTE! Form 673 only applies to income earned from services performed outside of the United States. Income earned within the US is still subject to taxes and cannot be exempted through Form 673.

How Form 673 works

Form 673 works by allowing US expats to claim an exemption from withholding taxes on foreign earned income, up to a certain limit.

The form serves as a notification to your employer of your intent to claim the exemption and certifies that you meet the eligibility requirements.

The maximum amount of foreign earned income that can be excluded from taxes in 2024 is $126,000. However, this amount is subject to change and may vary depending on your specific circumstances.

NOTE! Form 673 only applies to federal income tax withholding. State taxes may still apply to your foreign earned income, depending on the state in which you reside.

Who qualifies for Form 673?

To qualify for Form 673, you must meet the following criteria:

• You are a US citizen or resident alien.
• You are working abroad.
• You have earned income that is subject to US taxes.
• You meet either the physical presence test or the bona fide residence test.

The physical presence test requires you to be physically present in a foreign country for at least 330 full days during a 12-month period. NB! The 330 days do not need to be consecutive and can be spread out over the course of a year.

The bona fide residence test requires you to be a resident of a foreign country for an uninterrupted period that includes a full calendar year.

This means that you must have established a permanent residence in a foreign country and have no intention of returning to the US.

NOTE! Meeting the requirements for Form 673 does not automatically exempt you from filing a tax return. You may still need to file a tax return, even if you are exempt from withholding taxes through Form 673.

It is important to consult with a tax professional to determine your specific tax obligations.

How to fill out Form 673?

Form 673 is divided into three parts that you need to fill out accurately to claim foreign earned income and housing exclusions.

Let's take a look at each section:

Part I: Qualification Information for Foreign Earned Income Exclusion

In this section, you'll need to provide your personal and employment information, including:

• your name,
• social security number,
• employer's name,
• address.

Then, you'll need to indicate whether you qualify for the physical presence test or the bona fide residence test, which determine your eligibility for the foreign earned income exclusion.

For the physical presence test - you must have been physically present in a foreign country or countries for at least 330 full days during a 12-month period.

For the bona fide residence test - you must be a resident of a foreign country for an uninterrupted period that includes an entire tax year, and have established a bona fide residence in that country.

NOTE! Make sure to double-check your dates and eligibility criteria to ensure that you're filling out this section accurately.

Part II: Estimated Housing Cost Amount for Foreign Housing Exclusion

If you're eligible for the foreign housing exclusion, you'll need to fill out Part II of Form 673.

In this section, you'll need to provide an estimate of your foreign housing expenses for the tax year, including rent, utilities, and other expenses.

Pro tip. Keep in mind that the foreign housing exclusion is subject to certain limits based on your location, so it's important to check the IRS guidelines to ensure that your estimated housing cost amount is within the allowable limit.

Part III: Certification

The final part of Form 673 is the certification section, which simply requires your signature and the date of signing.

By signing the form, you're certifying that the information provided is true, accurate, and complete to the best of your knowledge and belief.

How to submit Form 673 to your employer?

Once you've completed all three parts of Form 673, it's time to submit it to your employer.

The easiest way to do this is to simply provide a hard copy of the completed form to your employer's human resources or payroll department.

Alternatively, you may be able to submit the form electronically if your employer has an online portal or electronic document submission system.

NOTE! Make sure to follow your employer's specific submission guidelines to ensure that your form is received and processed in a timely manner.

Form 673 preview

What are the penalties for not filing Form 673?

If you are eligible for Form 673 and fail to file the form with your employer, you may be subject to penalties for underpayment of taxes. The IRS may impose a penalty of 20% of the amount of taxes that should have been withheld.

In addition, failure to file Form 673 may also result in additional taxes, interest, and penalties if the IRS determines that you owe taxes on your foreign earned income.

It is important to file Form 673 as soon as possible if you are eligible to avoid any potential penalties or additional taxes.

Consequences for filing Form 673 incorrectly

If you file Form 673 incorrectly, you may be subject to penalties or additional taxes.

For example, if you claim an exemption for income that does not qualify under the physical presence or bona fide residence test, the IRS may assess additional taxes, interest, and penalties.

In addition, if you claim an exemption that exceeds the maximum allowable amount, the IRS may assess additional taxes, interest, and penalties.

Consult with a tax pro if you are unsure about how to properly fill out Form 673 or if you have any questions about your eligibility for the form.

Bottom Line

Form 673 is a valuable tool for US expats who meet the eligibility requirements to reduce their taxes on foreign earned income. It is important to fill out the form correctly and submit it to your employer as soon as possible to avoid any potential penalties or additional taxes.