How to File Taxes as an Expat
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Understanding Form 673: Claiming Exemption From Withholding on Foreign Earned Income via Section 911
If you’re a US expat, you should understand that you’re still required to fill out a US federal tax return—even if you haven’t earned any income from employers or clients in the United States. You’re also responsible for a variety of different financial obligations, though much of your foreign-earned income will be excluded.
One of your responsibilities could be correctly filling out and submitting federal Form 673: Statement for Claiming Exemption From Withholding on Foreign Earned Income Eligible for the Exclusion(s), Provided by Section 911. It may seem confusing when you first see it, but once you break it down, it will look much more reasonable.
What Is Form 673 For?
Let’s start with a basic description of Form 673, since the official name for the form is a bit wordy. Basically, taxpayers will file Form 673 with US employers when they want to claim an exemption from US income tax withholding on wages they earn while living in a foreign country. In other words, if you’re continuing to make money from a US employer while living overseas, you can fill out this form to exclude a portion of your income from being subject to income tax withholdings.
Who Should Fill Out Form 673?
Many US expats will want to fill out Form 673. If you are an overseas US employee, and you believe you’ll be able to earn the overseas earned income and housing exclusions, you’ll need to fill out Form 673. You will need to complete this form when you are hired, and for each subsequent year these conditions apply to you. Your employer will then be responsible for keeping your completed, up-to-date 673 form in your personnel file. They will then either stop withholding taxes from your paychecks, or adjust their withholdings to reflect the new information.
Note that if you’re merely an overseas consultant, you will not need to fill out Form 673. This is because federal and state payroll taxes aren’t typically withheld from consultants’ pay.
How to Complete Form 673
Now let’s dig into how to fill out Form 673. In the introductory section, you’ll provide your first name and middle initial, your last name, and your social security number (SSN). This bears resemblance to a number of other IRS forms, so it should be relatively easy.
In Part I, you’ll need to provide “Qualification Information for Foreign Earned Income Exclusion.” Here, you’ll need to provide proof that you’re going to be living overseas in one of two different ways. You can either qualify based on the bona fide residence test, or the physical presence test. In the bona fide residence test, you’ll need to live in a foreign country for a full calendar year. For example, if you’re filling out Form 673 for the year 2019, you’ll need to be a resident of a different country from January 1, 2019, to December 31, 2019. For many taxpayers, the more flexible, more appropriate option is the physical presence test. Here, you’ll be required to spend 330 of 365 days in any 12-month period living in a foreign country. You may define the 365-day period how you like; for example, you may live in a foreign country for 330 days in the period from September 1, 2018 to September 1, 2019.
You will only need to qualify for one of these options.
In Part II, you’ll need to provide “Estimated Housing Cost Amount for Foreign Housing Exclusion.” There are nine line items you’ll need to provide, though not all will necessary apply to you:
First, you’ll need to provide the amount of yearly rent you pay for your residence.
Utilities include bills for things like water, electricity, natural gas, and other essentials. Note that telephone charges are not included in this line item.
Real and personal property insurance.
In this line, you’ll include any expenses you pay for your real and personal property insurance.
Occupancy tax not deductible under Section 164.
Section 164 allows you to deduct some or all of your occupancy taxes; for any occupancy tax you pay that is not deductible under Section 164, you may include that section here.
Nonrefundable fees paid for securing a leasehold.
Occasionally, you’ll be required to pay a fee to secure a lease that is nonrefundable; for example, you may have to pay application fees. Include these here. Note that a potentially refundable security deposit is not included here.
You will include any expenses you incurred to make household repairs or conduct regular maintenance in this line.
Estimated qualified housing expenses.
Here, you’ll add up all the expenses listed in lines one through six.
Estimated base housing amount for your qualifying period.
You will also need to evaluate the estimated base housing amount
Estimated housing cost amount.
Finally, you’ll subtract line eight from line seven; this will be your final estimated housing cost amount. Note that the amount of qualified housing expenses eligible for the housing exclusion will be limited, depending on the location of your foreign home. Form 2555 and Pub 54. will provide more information on this front.
Then we have part III. Part III provides certification, requiring you to formally assert that, to the best of your knowledge:
The estimated housing cost you calculate in Part II, plus the amount you’ve reported on any other statements currently with other employers, isn’t more than your total estimated housing cost amount.
If you ever become disqualified for these exclusions, you will quickly notify your employer and inform them of the necessary changes.
You will also certify that you understand that any exemption from income tax withholdings is not a determination by the IRS that any amount paid to you is excludible from income taxes. If you certify these things, you will sign and date the form.
Providing the Form to Your Employer
Once you’ve completed the form, you’ll need to provide the form to your employer. Once your employer receives Form 673, completed, they will be able to discontinue withholding US income taxes on any eligible income you make. However, if they believe that you will not qualify for these exclusions (like if they believe there is a mistake on your form), they have the power to disregard Form 673. Be sure to talk to your employer if you believe there may be confusion.
Other Forms and Responsibilities
Remember, as a US expat, you’re still going to be responsible for filing a federal income tax return, even if you don’t anticipate owing US taxes. In many cases, you’ll still owe taxes on income you earn from US employers while living abroad. If you are still subject to income tax withholdings, you may also be eligible for a refund.
If you’re going to qualify for the foreign earned income exclusion (FEIE), and/or the foreign housing exclusion or deduction, you will also need to complete Form 2555 and attach it to your Form 1040 or 1040-SR. Depending on your net worth, and how much you currently have in foreign accounts, you may also need to comply with FBAR reporting. And depending on the state in which you previously resided, you may also need to file a state-level return.
Are you feeling overwhelmed by the complexities of accounting for taxes as a US expat? Taxfyle exists to help people like you. Start your taxes today, or check out our blog to learn more about taxes for expats.
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