U.S. citizens and permanent residents who reside outside the United States can find themselves facing reporting and tax filing requirements that often seem daunting. Fortunately, the IRS has provided ways to make life just a little bit easier for these individuals. This week and next we will discuss two forms that individuals residing overseas might find helpful.
Form 2350: Application for Extension of Time to File U.S. Income Tax Return
U.S. citizens and permanent residents who are living abroad are eligible for special tax treatment to avoid double taxation of their income by the United States and a foreign government. One way to accomplish this is to take advantage of the foreign earned income exclusion. This allows an eligible taxpayer to exclude up to $102,100 of foreign earned income (2017 amount). This annual amount is prorated based on months eligible and indexed each year for inflation.
Sounds great, right? Well, as is often the case, there’s a catch. In order to qualify, taxpayers must show that their tax home is in a foreign country and that they satisfy either the bona fide residence or the physical presence test. It often takes a year from the taxpayer’s date of move to the foreign country for these requirements to be met.
Imagine the following scenario: A U.S. citizen is transferred to France by his employer on November 15, 2017. The taxpayer expects to remain overseas for at least three years before returning to the United States. He contacts his tax consultant and asks about options, since he will be paying taxes in France on his wages. As of the April filing deadline, he will not have had enough time to satisfy either the bona fide residence or the physical presence test. He could file an extension of time to file, but that would only extend his filing deadline through October 15, 2018. This is still not enough time. What can he do?
Form 2350 to the rescue! His tax consultant prepares Form 2350 and files it for this client, requesting an extended due date of December 15, 2018 (30 days after the end of the taxpayer’s qualifying 12-month period). The client now has an extended period of time to satisfy the physical presence or bona fide residence test and exclude some of his 2017 foreign earned income from U.S. taxation.
Stay tuned next week for a breakdown of Form 673, which can also help individuals residing overseas.