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Expatriate Tax Terms Glossary


Annual Tax Forms Reported to the IRS

Form Name

Form Description

Where you get it

W2

Wages and Tax Statement

U.S. Employer

1099- MISC

Miscellaneous Income

Business, government agency, or a trust that paid you $600 or more during the calendar year

1099-R

Retirement Plan Distributions

Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts that made a distribution of $10 or more to you during the calendar year

1099-B

Proceeds from Broker and Barter Exchange

Financial institution that has sold for you stocks, bonds, commodities, or other financial instruments for cash or through a barter exchange

1099-INT

Interest Income

Financial institutions that paid you at least $10 of interest during the calendar year

1099-DIV

Dividends and Distributions

Financial institutions that paid you dividends (including capital gain dividends) and other distributions on stock of $10 or more during the calendar year

1099-A

Aquisition or Abandonment of Secured Property

Any entity that lent you money and acquired property securing the debt as full or partial satisfaction of the debt

1099-C

Cancellation of Debt

A qualified lender to whom you owed $600 or more and who cancelled your debt

1098

Mortgate Interest Statement

Lending institution that received from you $600 or more of mortgage interest including points during the calendar year

1098-E

Student Loan Interest Statement

Financial institution, government unit or education institution that received from you interest payments of $600 or more during the year on qualified student loans

1098-T

Tuition Statement

Eligible educational institution that received from you payment for qualified tuition and related expenses or made to you reimbursements of qualified tuition and related expenses

1098-C

Contributions of Motor Vehicles, Boats, and Airplanes

A charitable organization to which you donated a qualified vehicle with the claimed value of more than $500

2555 Foreign Earned Income Form 2555 used to calculate foreign earned income exclusion and housing exclusion for those who qualify

Schedule K-1

A Beneficiary’s Share of Income, Deduction, Credits, etc.

Pass-through entities including limited partnerships, S Corporations, income trusts, and Limited Liability Companies

 

Expat Tax Terms




Back Taxes

Taxes that have not been paid on the due date or were underreported either by accident or by intention on a past tax return. The tax authorities (IRS) can demand payment of back taxes as well as impose penalties and/or interest.

 

Bona Fide Residence Test 

The bona fide residence test requires the taxpayer to be a bona fide resident of a foreign country or countries for an uninterrupted period that includes a full tax year. To meet this test, you must be one of the following:

  1. A U.S. citizen who is a bona fide resident of a foreign country, or countries, for an uninterrupted period that includes an entire tax year or
  2. A U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treatyin effect and who is a bona fide resident of a foreign country, or countries, for an uninterrupted period that includes an entire tax year
We have written a full article on the Bona Fide Residence Test

Dual Status Alien

You are a dual status alien when you have been both a resident alien and a nonresident alien in the same tax year. Dual status does not refer to your citizenship, only to your resident status for tax purposes in the United States. In determining your U.S. income tax liability for a dual-status tax year, different rules apply for the part of the year you are a resident of the United States and the part of the year you are a nonresident. The most common dual-status tax years are the years of arrival and departure. 

 

Expatriate

An expatriate is a person temporarily or permanently residing in a country other than that of the person's legal residence.

 

Foreign Earned Income Exclusion

Qualifying  U.S. citizens and residents working outside the  United States are permitted to elect to exclude a portion of their foreign earned income under the Internal Revenue Code (IRC). This section provides a general exclusion limited to a specified amount, another exclusion measured by foreign housing costs, and, for self-employed persons, a foreign housing cost deduction.

To qualify for the foreign earned income and housing cost exclusions, the individual must have foreign earned income, his or her tax home must be in a foreign country, and he or she must meet bona fide residence test physical presence test.U.S. citizens may qualify under either the bona fide residence or physical presence test. A U.S. resident alienworking abroad can qualify under the physical presence test, and in certain limited cases, tax treaty nondiscrimination rules may permit qualification under the bona fide residence rule.

 

Foreign Tax Credit

The U.S. tax code that taxes citizens and permanent residents on worldwide income offers a foreign tax credit to mitigate the potential for double taxation.  The credit generally applies only to taxes of a nature similar to the tax being reduced by the credit (i.e., taxes based on income).  The source of income is determined separately for each type of income. This credit is limited to the amount of tax attributable to foreign source income.

 

Host Country

The country in which the expatriateresides.  

 

Housing Allowance/Reimbursement

An amount paid by the company to enable the expatriate to rent or lease housing in the host country. A housing allowance is an amount generally paid to the assignee representing the company's contribution to his/her local housing. An allowance is generally a set amount and may be more or less than the actual housing costs incurred. A housing reimbursement is generally an amount paid either directly to the property owner/landlord or to the assignee, and is a direct reimbursement of the actual cost of housing.

 

Installment Agreement

Agreement with the IRS that allows the taxpayer to pay back tax debt in smaller, more manageable amounts. There are tax debt solutions available for those in need.

 

IRS Power of Attorney

The legal form giving an authorized individual (Certified Public Accountant, Enrolled Agent or attorney) authority to represent the taxpayer before the Internal Revenue Service.

 

Minimum Threshold

All U.S. citizens and green card holders are required to file a federal tax return each year if their income is over the minimum threshold. It doesn't matter where the income was earned, and it doesn't matter if taxes are paid locally. The federal thresholds are currently:

  • single filers with income over $8,950
  • married filers filing jointly with income over $17,900
  • married filers filing separately with income over $3,500.
If you are self-employed, you still have to pay self-employment tax (Social Security), which must be paid without regard to the foreign earned income exclusion. The Social Security Administration web site details  how it will work in your circumstance, but generally speaking, you will either need to pay U.S. Social Security taxes or opt out of it. You probably never thought about this, and you may already pay a local version of this tax (such as National Insurance in the U.K.). If you have not filed in a few years, this can add up, and you may owe thousands or hundreds of thousands of dollars.

 

Non-Resident Alien

A nonresident alien is an any individual who is not a U.S. citizen or U.S. national and who has not passed the green card test or the substantial presence test.

 

Physical Presence Test

To meet this test, you must be a U.S. citizen or resident alien who is physically present in a foreign country or countries, for at least 330 full days during 12 consecutive months. 

This test is based only on physical presence and does not depend on the type of residence you establish or the purpose of your stay.  You do not have to be in a foreign country for employment purposes the entire time – vacation periods also count toward meeting the total number of days.

The 330 days do not have to be consecutive and can be interrupted by periods when you are traveling over international waters or are otherwise not in a foreign country.  To figure out whether you qualify for the minimum of 330 full days of presence, add all separate periods you spent outside of the US during the 12 month period. 

A nonresident alien who, with a U.S. citizen or U.S. resident alien spouse, chooses to be taxed as a resident of the United States may qualify under this test if the time requirements are met.

We have written a full article on the Physical Presence Test


Resident Alien 

Applies to non-U.S. citizens currently residing in the United States. For example, green card holders by definitions are resident aliens.  While they temporarily reside outside of the U.S., they can keep the green card and remain resident aliens in the eye of the INS and the IRS.

 

Split Pay

Payment of expatriate’s estimated local living costs in local currency and the remainder in home-country currency.

 

Statute of Limitations

A statute limiting the period within which a specific legal action may be taken, such as the collection of tax, appeal from a decision of the tax authorities or lower court, etc. If you do not file a tax return for a given tax year, the statute of limitations for that year never runs out. Therefore it is advisable to file a return for each year, even if your taxable income falls below the minimum amount required. This is done in order to cause the statute of limitations to run out.

If you do file your tax return each year while living abroad,  the statute of limitations for IRS audits will expire three years after you file those returns. This means that the IRS cannot go back (absent fraud) and try to audit or challenge those returns later. Therefore, you should file your return even if you have no income or don’t owe taxes in order to force the statute of limitations to run out and eliminate future problems when you decide to return to the U.S.

 

Tax Incentives for Higher Education

The tax code provides a variety of tax incentives for families who are saving for, or already paying, higher education costs or are repaying student loans.

You may be able to deduct interest you pay on a qualified student loan. You can also claim tax credits or income deduction for the qualified tuition and related expenses of the students in your family (i.e., you, your spouse, or an eligible dependent) enrolled in eligible educational institutions.

An eligible educational institution is a  postsecondary educational institution (including many foreign institutions) eligible to participate in a student aid program administered by the U.S. Department of Education. You can find out whether the institution is eligible by calling FAFSA at 1-800-433-3243.

 

Tax Problem

Tax problems can refer to any type of issues taxpayers are having with the IRS (federal) or state tax authority. These problems may include garnishments, levies, liens, back taxes and interest owed. They arise if the taxpayer  hasn't filed a tax return, hasn't paid his business taxes, hasn't paid his self-employment taxes, can't pay his Installment Agreements, etc.

 

Tax Treaty

The United States has income tax treaties with a number of foreign countries. Under these treaties, residents (not necessarily citizens) of foreign countries are taxed at a reduced rate, or are exempt from U.S. income taxes on certain items of income they receive from sources within the United States. These reduced rates and exemptions vary among countries and specific items of income.


United States Person

The term United States person means (1) a citizen or resident of the United States, (2) a domestic partnership, (3) a domestic corporation, or (4) a domestic estate or trust.


Waiver of Time Requirements

You do not have to meet the minimum time requirements for bona fide residence or physical presence  if you have to leave the foreign country because war, civil unrest, or similar adverse conditions in the country prevented you from conducting normal business. You must, however, be able to show that you reasonably could have expected to meet the minimum time requirements if the adverse conditions had not occurred. To even be considered for this waiver, your tax home must have been established in the foreign country prior to the hostility or war. The request for waiver of time requirements due to the adverse conditions is made via the IRS form 2555 (Foreign Earned Income).
 

Worldwide Income

Criterion for the income tax liability of a U.S. citizen or resident. The U.S. citizens or residents are liable for income tax on their worldwide income, subject to double taxation relief.