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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
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Experience:  Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
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Hello I will move to overseas soon. Lets say for 2014 my stay

Resolved Question:

Hello
I will move to overseas soon. Lets say for 2014 my stay in USA exceeds 30 days and I can not benefit from Foreign income exclusion credit

1-In this case, I deduct my foreign taxes and file taxes to US like that. Does this mean, because I am not paying any tax witholding to US during the year, I will have to make taxes 4 times a year to US. In other words, Expat people, who does their tax by deducting foreign tax, instead of Foreign Income exclusion, file taxes to US 4 times a year?

2-lets say my stay in US doesnt exceed 30 days next year and I am able to choose the method I want (foreign income exclusion or tax deduction). Once I choose it, I can never change my method again in the future, or can I change it based my my future situation anytime? Because I plan to stay very long years or permanently outside US.
Submitted: 11 months ago.
Category: Tax
Expert:  Lane replied 11 months ago.

Lane :

Hi,

Lane :

There are really 2 issues here (1) Whether to pay estimated taxes quarterly (because there's no withholding going on) and (2) the foreign income exclusion

Lane :

On the first, what you really doing is being sure that you don't end up with an underpayment penalty when you do your taxes after the end of the year because you did not pay enough all along the way

Lane :

Whether this happens through withholding from W-2 wages or through quarterly estimated payements there will be an amount that should have been paid in by the time you actually DO your taxes

Lane :

ON the second issue, the foreign earned income exclusion, this is something that will also be done with your taxes after the end of the year, IF it turns out that you qualify

Lane :

Here are the requirements for the Foreign Earned Income Exclusion: http://www.irs.gov/Individuals/International-Taxpayers/Foreign-Earned-Income-Exclusion---Requirements

Lane :

And here are the guidelines regarding the underpayment penalty from IRS as well: http://www.irs.gov/taxtopics/tc306.html

Lane :

I still don't see you coming into the chat session, so I'll move us to the "Q&A" mode. … Maybe that will help … (We can still continue a dialogue there, just not in real-time chat, as we can here)


Please let me know if you have any questions at all ...


Lane

Expert:  Lane replied 11 months ago.
Our chat has ended, but you can still continue to ask me questions here until you are satisfied with your answer. Come back to this page to view our conversation and any other new information.

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Customer: replied 11 months ago.

so on my first question, since i will be abroad, and the company abroad has nothing to do with any american paperwork, so there is no W2, I must do quarterly payments? So in other words, does it mean, all expatriates, who live abroad and have income, file tax returns 4 times a year?


 


on my 2nd question, i am asking this: when you choose either Foreign Income Exclusion or Tax deduction option in your first expat year, for all the following years, must you keep that selection forever? Because one accountant had told me so and it didnt make sense to me. I am asking to get second opinion

Expert:  Lane replied 11 months ago.

You won't actually do 4 full returns. You'll still only do the actual return one time per year (due by april 15th of the year following the tax year in question).

You use just send in this form:Form 1040-ES which is really just a payment voucher to send in 1/4 of what you think your yearly tax will be.

No, the Foreign earned income exclusion is just a form: Form 2555, Foreign Earned Income that you'll use as an attachment to your tax return at the end of the year, which, when you work through it, will arrive at a number that you will carry to line 21 of your actual tax return (as a negative number that reduces your taxable income dollar for dollar )

And the deduction that I think he must be referencing is the deduction for taxes paid to a foreign government (and there ARE two choices there, but as you'll see if you read this, you can choose a different one each year depending on what is most adventageous: http://www.irs.gov/Individuals/International-Taxpayers/Foreign-Tax-Credit---Choosing-To-Take-Credit-or-Deduction

From there, the very first paragraph says the following:

"You can choose each tax year to take the amount of any qualified foreign taxes paid or accrued during the year as a foreign tax credit or as an itemized deduction. You can change your choice for each year's taxes."



Now, what he MAY have said is that you can't take the forrign tax credit (or the deduction) AND the foreign earned income exclusion together in the same year.

That would make more sense.

Take this, along with the linked information, (everything will stay here and the links will stay active once you rate, for as long as you need it) to your accountant and I bet you'll get on the same page.




Hope this helps

Lane
Customer: replied 11 months ago.

ok so, if i choose foreign income exclusion option at the end of the year, (and assuming my overseas income will be less than 97 K) because i will not owe any tax on it to USA, so i will not have to do estimated taxes correct?


 


but if at a later year, say i establish a business there and it becomes succesfull and i earn much more than 97 K, and i choose to take other option, which is deducting the foreign tax paid, and if i think i will end up with tax to US, then for that only i have to make estimated payments correct?


 


and no matter which option i choose, i can change it later , according to what you said as I understand. i was concerned because in my first years i will just work somewhere and taking just the income exclusion is easier. but what if i start a business there and start making a lot of money? then deducting just 97K and paying double tax on the rest wont make sense. so i have to be absolutely sure that it is interchangeable every year


 


so estimated tax payments is really only that form and nothing else? so it is not like filing income tax, it is just making a payment right? and to fill it out, because i will have foreign income, i will have to use the other worksheets related to foreign income to calculate just like when doing regular income taxes correct?

Expert:  Lane replied 11 months ago.

Sorry, just broke outof a meeting this afternoon:


ok so, if i choose foreign income exclusion option at the end of the year, (and assuming my overseas income will be less than 97 K) because i will not owe any tax on it to USA, so i will not have to do estimated taxes correct?

THAT'S CORRECT


but if at a later year, say i establish a business there and it becomes successful and i earn much more than 97 K, and i choose to take other option, which is deducting the foreign tax paid, and if i think i will end up with tax to US, then for that only i have to make estimated payments correct?

CORRECT, AS WELL

but if at a later year, say i establish a business there and it becomes successful and i earn much more than 97 K, and i choose to take other option, which is deducting the foreign tax paid, and if i think i will end up with tax to US, then for that only i have to make estimated payments correct?


and no matter which option i choose, i can change it later , according to what you said as I understand. i was concerned because in my first years i will just work somewhere and taking just the income exclusion is easier. but what if i start a business there and start making a lot of money? then deducting just 97K and paying double tax on the rest wont make sense. so i have to be absolutely sure that it is interchangeable every year

IT US. YOU CAN SEE THAT IN THE IRS INFORMATION ABOVE. YOU CAN'T CHANGE IN THE MIDDLE OF THE YEAR, BUT YES, THESE ARE JUST DECISIONS ABOUT HOW YOU DO YOUR TAXES EACH YEAR.



so estimated tax payments is really only that form and nothing else? so it is not like filing income tax, it is just making a payment right? and to fill it out, because i will have foreign income, i will have to use the other worksheets related to foreign income to calculate just like when doing regular income taxes correct?

YOU HAVE IT, COMPLETELY.

THE 1040-ES (YOU'LL SEE ONCE YOU LOOK AT IT) IS JUST A HALF PAGE PAYMENT VOUCHER. YOU'LL USE THOSE AMOUNTS (TOTALED) JUST AS YOU WOULD YOUR W-2, TO PUT AT THE END OF THE ANNUAL RETURN, TO SEE WHETHER YOU HAVE TO PAY A LITTLE MORE OR HAVE A REFUND.



Lane

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Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3913
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and 10 other Tax Specialists are ready to help you
Expert:  Lane replied 10 months ago.
Hi,


I'm just following up with you to see how everything is going. Did my answer help?


Let me know,
Lane

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