Jane A. Bruno, J.D.
2006 

US TAXES AND AMERICANS ABROAD

Introduction Tax season is never far away. It seems we are always either recovering from getting last year's return filed or preparing for next year's. Preparation is especially important for Americans living overseas. Because the U.S. tax rules relating to expats are quite unique, it is important that you understand what information you should be gathering. The following article will help explain the process. Keep in mind that if you live overseas, your filing deadline is automatically extended to 15 June of the year following the tax year). You don't need to apply for this special extension, but you do need to attach a brief statement to your return certifying that you were residing outside the United States on 15 April.
Income Information Naturally, the IRS is very interested in how much money you made in the year. Generally, if you work for an American company overseas, you will get a W-2 showing your income. Be sure to attach the W-2 to your return. If you work for a foreign company, you still need to report your income and it has to be in U.S. dollars. First ask your company for your total income in the calendar year. To convert it to U.S. dollars, you can use the average exchange rate for the year. If you don't know what that is, you can go to: www.oanda.com. This nifty website shows the exchange rate for 164 countries on any day since January 1, 1990. You should not attach your foreign pay stub to your tax return.

In addition, if you are reimbursed or receive an allowance for certain living expenses, you must include these amounts as income. Examples are a cost-of-living allowance, overseas differential, housing reimbursement or allowance, education reimbursement for your children's schooling, reimbursement of home leave expenses, payment of foreign tax on your behalf, etc. You also need to report as income the fair market value of housing, a car, meals or other benefits provided by your employer.

Travel Information It is important to keep track of the dates you are in the U.S. when you live overseas. These dates will help determine if you qualify for the foreign income exclusion, and they must be listed on IRS Form 2555, Foreign Earned Income, when you prepare your tax return. If you plan to use the "physical presence" test, you will also be asked the dates you were in other countries. If you are traveling in the U.S. on business, you will be expected to report some amount of income as earned in the U.S. on that trip. One way of calculating that is to divide your salary by the number of work days in the year (usually 240). That daily salary is then multiplied by business days in the U.S. to arrive at the U.S.-source income. Note that this amount cannot be excluded as foreign income and is subject to U.S. tax.
Employer Information Be sure to have ready your employer's name and address as well as the type of organization it is (foreign, U.S. corporation, nonprofit, etc.) as you will need to report that on the Form 2555 to claim the foreign income exclusion.
Housing Exclusion/Deduction You will want to calculate all your housing expenses, including amounts paid for rent (or the fair value of rent if your employer provides housing), repairs, utilities, real and personal property insurance, furniture rental, residential parking fees, etc. These amounts will be used to calculate the foreign housing exclusion or deduction. Generally, if your income is below the maximum exclusion for the year ($82,400 in 2006), you needn't bother with this exercise because the housing exclusion or deduction won't benefit you anyway. Note also that you cannot include as a housing expense any amounts spent to purchase your home, such as mortgage interest payments. Nor can you include telephone charges, the cost of domestic help, purchased furniture, deductible taxes, or the cost of improvements to the property. And under the new law passed in May 2006, the maximum housing exclusion is $11,586 no matter how high your housing costs are.
Foreign Tax If you pay foreign income tax and your income is over $82,400 for 2006, you need to find out how much tax was paid for the calendar year and when it was paid. You may be able to take a foreign tax credit to the extent foreign tax was paid on income over the exclusion amount.
Miscellaneous On top of all this, don't forget you will still need all the basic information you normally use in preparing your tax return, such as dividends and interest earned, details on the sale of capital assets, like stocks and bonds, information on itemized deductions, etc.
Conclusion Preparation is the key to reducing the headaches connected with preparing your tax return. Take the time now to understand what you need. If you put the information together before you start filling out the forms or contacting your tax preparer , you will save yourself time, money and needless worry.
 

Jane Bruno owns and operates a tax consulting and preparation business specializing in Americans overseas. She is also the author of The Expat's Guide to U.S. Taxes. She can be reached by phone: +1 561 625-6935 or +1 561 222-9273 or fax: +1 561 625-6935 or email: janebruno@bellsouth.net