Tax Home in a Foreign Country

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 What Is a Tax Home?

Your tax home is your main place of:

  • Business
  • Employment
  • Post of duty

In other words, your tax home is where you permanently and indefinitely work as an employee or self-employed individual. This does not mean that it is your residence or domicile for tax purposes.

What Are Foreign Earnings?

During the time your tax home is in a foreign country, and you meet either the bona fide residence test or the physical presence test, foreign earned income is defined as:

  • Wages
  • Salaries
  • Professional fees
  • Other amounts received as compensation for personal services performed in a foreign country

Foreign income is defined by where you perform the services, not where or how you are paid. If you receive income for personal services provided in France, even if the employer is American and your pay is deposited in an American bank, it is foreign earned income.

What Should I Do if I Don’t Have a Regular Place of Business?

Because of the nature of your work, you may not have a regular or main place of business. Your tax home could be where you live regularly. You are considered an itinerant if you do not have a regular business or residence, and your tax home is where you work.

If I Live in a Foreign Country, Do I Have a Tax Home There?

When your residence or main place of business is in the United States, you do not have a tax home in a foreign country.

While temporarily living in the U.S., your residence or main place of business may not necessarily be in the U.S. since visiting the U.S. for a short time does not automatically change your tax home.

Maintaining a residence in the United States while actually living and working abroad does not mean that your tax home is in the United States, regardless of whether your spouse or dependents reside there.

Indefinite or Temporary Assignments

In many cases, the location of your tax home depends on whether you are there temporarily or permanently:

  • Temporary: If you are temporarily absent from your U.S. tax home, then you may be able to deduct your expenses while away from home. However, you probably would not qualify for the foreign earned income exclusion.
  • Indefinite: If your new work assignment is for an indefinite period, then the place you work becomes your new tax home. If the new tax home is in a foreign country and meets the other requirements, you might be eligible for foreign income tax exclusion.

What Is My Foreign Income Tax Treatment if I Am a U.S. Citizen?

If you are a U.S. citizen, you are taxed on any income you earn, whether it is earned in the country or abroad. Whether you live in the U.S. or abroad, the rules for income, estate, gift, and estimated taxes are generally the same.

Additionally, if any of the following applies to you, you must file additional documents with the IRS:

  • You invest in international corporations as a shareholder
  • You receive large gifts from a foreign person
  • You receive disbursements from a foreign trust or own part of one
  • You are receiving interest on foreign bank accounts

Are Foreign Nationals Taxed on U.S. Income?

You pay different taxes depending on whether you are a resident alien or a non-resident alien.

In order to qualify as a resident alien, a foreign national must:

  • Obtain a green card
  • During the current tax year, be physically present in the United States for 183 or more days
  • Assume the status of a resident alien for tax purposes.

Non-resident aliens are those who do not meet one of the above three criteria. To summarize:

  • Resident Aliens: Resident aliens are taxed exactly like United States citizens.
  • Non-Resident Aliens: Non-resident aliens are subject to different taxes than resident aliens. Non-resident aliens’ U.S. business income is taxed just like a U.S. citizen’s would be. They are also taxed 30% on all other sources of income generated in the United States (i.e., interest payments).

Foreign Corporations

As a foreign corporation operating in the United States, you must also pay taxes on business income and other sources of income (e.g., investment returns).

Do I Qualify for Foreign Earned Income Exclusion?

Both U.S. citizens and resident aliens may be eligible for foreign earned income exclusion:

  • If U.S. citizens have a foreign tax home, they may be able to exclude up to $80,000 if they meet either of two tests:
    • The bona fide residence test: In order to meet the bona fide residence test, you must find out if you have established such a residence in a foreign country. A bona fide residence is not necessarily the same as a domicile.
    • The physical presence test: You meet the physical presence test if you are physically present in a foreign country or countries for 330 full days during a period of 12 consecutive months. The 330 qualifying days do not have to be consecutive.

Resident aliens of the United States with a tax home in a foreign country may be eligible for the exclusion if they meet one of the following qualifications:

  1. The physical presence test
  2. If they are citizens or nationals of a country with which the United States has an income tax treaty with an applicable nondiscrimination clause, and they meet the bona fide residence test

What If I Cannot Figure Out My Tax Home? Should I Hire a Lawyer?

International tax is an extremely complex area of the law. You may want to consult a tax lawyer who knows tax homes and other international tax issues. You can solve your problems with the help of an experienced tax lawyer.

Tax law issues can arise for a variety of reasons. Late filing of taxes and failure to pay fines associated with late filing is among the most common tax litigation issues. Do not subject yourself to these problems.

A person facing such a situation should strongly consider hiring a tax attorney. A tax lawyer can identify exceptions to these cases where tax penalties should not be imposed and can argue in court or negotiate a deal with the IRS to eliminate them.

Failure to keep copies of tax returns is another common tax law issue. Tax returns from the previous year are usually required when filing taxes, but they also serve as evidence that taxes were indeed filed and can be referred to if a tax return needs to be amended. Also, old tax returns can be helpful during IRS audits, tax fraud investigations, and tax disputes.

Businesses and individuals hire tax attorneys primarily to maintain and store records of their tax returns, as discussed above. A tax attorney hired for this purpose will also keep financial documents associated with those records, such as receipts or property titles. These records are essential when dealing with the final issue, business deductions.

The IRS can penalize or sue businesses for failing to keep good records of their expenses and tax deductions. It is also possible for businesses to face fines or lawsuits when they mix funds with personal expenses and try to deduct them. These records should be kept in good condition, and a tax attorney can defend businesses against lawsuits and penalties.

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