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Robin D.
Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 15443
Experience:  15years with H & R Block. Divisional leader, Instructor
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-I am a US Citizen living in Europe. I am retired military

Customer Question

-I am a US Citizen living in Europe. I am retired military so I collect a pension. I visit from time to time to the US. But I do not own anything in the US and the longest time I resided in the US was 4 months in 2006. After I retired, I understood that a US Citizen living overseas has to file for US federal income tax, but only if your income is over $80,000.00 yearly.
-I work for a US based company as a contractor. My work requires I travel throughout Europe and parts of Asia. I reside in the country of Spain. My income is based on job assignments that I perform for this company. Because I am a contractor and live Europe I have no benifits from this company? I have been receiving letters from the IRS stating that I need to file. So I need to pay taxes 2 countries? The US and the country of Spain?
-What the US IRS claims I need to pay in taxes is 2/3 of my annual income.....So why work?
Submitted: 7 years ago.
Category: Tax
Expert:  Robin D. replied 7 years ago.

Hello and thank you for using Just Answer.

A US Citizen is taxed on their worldwide income. In your case only your earned income is subjected tot he exclusion amount for income of US citizens that live abroad. Your pension is not subject to the exclusion from US taxation.

What is available to you though would be the Foreign Tax Credit. If you are taxed on income, wages or pension, in Spain then you are allowed to take a credit on your US tax return.

You are required to file every year as a US citizen but you are also allowed to use any and all credits and exclusions that are available to you. The 2/3 of income that you stated the IRS will want for taxes is most probably not correct. If a tax payer does not file a return, the IRS will prepare a substitute return for them. When this happens the IRS will not calculate all possible credits and deductions that the taxpayer is allowed.

I suggest you complete your returns and show the IRS that you are not really owing as much as they are attributing to you based on the Foreign Income Exclusion (Form 2555) and the Foreign Tax Credit (Form 1116).

Be cautioned though, you are not allowed to use the 2 forms mentioned and have the same income on each. In other words, if you use the forms 2555 and 1116, the wages are only on the 2555 and the pension taxed on the 1116.

I sincerely XXXXX XXXXX information is helpful,