US Internal Revenue Service: p54--1997

8/14/2019 US Internal Revenue Service: p54--1997

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ContentsImportant Reminders ......................... 1

Introduction ........................................ 2

1. Filing Information ......................... 2Filing Requirements ........................ 3Nonresident Spouse Treated as a

Resident ................................... 5Estimated Tax ................................. 6Information Returns and Reports ... 6

2. Withholding Tax .......................... 7Withholding .................................... 730% Flat Rate Withholding ............. 9Social Security and Medicare Taxes 9

3. Self-Employment Tax .................. 10Who Must Pay Self-Employment

Tax? ......................................... 10Exemption ....................................... 10

4. Foreign Earned Income andHousing: Exclusion-Deduction .. 11

Who Qualifies for the Exclusionsand the Deduction? ................. 11

Requirements .................................. 11Foreign Earned Income Exclusion . 18Foreign Housing Exclusion or

Deduction ................................. 19Form 2555 and Form 2555EZ ...... 21

5.Exemptions, Deductions andCredits .......................................... 27

Exclusion vs. Deduction ................. 27Exemptions ..................................... 27Contributions ................................... 27Moving Expenses ........................... 27Individual Retirement Arrangements 29Taxes of Foreign Countries and U.S.

Possessions ............................. 29How To Report Deductions ............ 30

6. Tax Treaty Benefits ...................... 31The Purpose of Tax Treaties .......... 31Common Benefits ........................... 31Competent Authority Assistance .... 32Obtaining Copies of Tax Treaties ... 32

7. How To Get More Information .... 32Problem Resolution Program ......... 33

Questions and Answers .................... 35

Index .................................................... 41

Important RemindersSocial security numbers for dependents.You must list the social security number(SSN) of any person for whom you claim anexemption in column (2) of line 6c of yourForm 1040 or Form 1040A. You do not needan SSN for a child who was born in 1997 anddied in 1997. Write Died in column (2) of line6c of your form 1040 or Form 1040A.

If your dependent does not have and isnot eligible to get an SSN, you must list thedependent's individual taxpayer identificationnumber (ITIN) instead of an SSN. See Social security number under Exemptions in chapter5.

Departmentof theTreasury

InternalRevenueService

Publication 54Cat. No. 14999E

Tax Guide forU.S. Cit izensandResident AliensAbroadFor use in preparing

1997 Returns

Get forms and other information faster and easier by:COMPUTER

World Wide Web www.irs.ustreas.gov FTP ftp.irs.ustreas.gov IRIS at FedWorld (703) 321-8020

FAX From your FAX machine, dial (703) 368-9694See How To Get More Information in this publication.


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Form 2555EZ. You may be able to file Form2555EZ, Foreign Earned Income Exclusion,if:

You had foreign earned income of onlywages and salaries of $70,000 or less,and

The return being filed is not for a shortyear.

Form 2555EZ has fewer lines than Form2555.

Foreign income tax withheld. If a foreignemployer withheld taxes from your pay andpaid those taxes to the foreign country's taxauthority (not the U.S. treasury), you cannotclaim those taxes on your U.S. income taxreturn as federal income tax withheld. Youcannot claim those taxes as federal incometax withheld even if the amount is reportedon your Form W2, Wage and Tax State- ment.

You may be able to claim a foreign taxcredit or a foreign tax deduction based on theamount withheld and paid to the foreign taxauthority. See Taxes of Foreign Countries

and U.S. Possessions in chapter 5.

Change of address.

If you change your mailing address,be sure to notify the Internal RevenueService using Form 8822, Change of

Address. Mail it to the Internal Revenue Ser-vice Center for your old address (addressesfor the Service Centers are on the back of theform). If you are changing both your homeand business addresses, you only need tocomplete one form.

IntroductionThis publication discusses the special taxrules for U.S. citizens and resident aliens whowork abroad or who have income earned inforeign countries. As a U.S. citizen or residentalien, your worldwide income generally issubject to U.S. income tax, regardless ofwhere you are living. Also, you are subject tothe same income tax filing requirements thatapply to U.S. citizens or residents living in theUnited States.

Filing information. The publication beginswith general filing information such as:

Who must file a U.S. tax return, When and where to file your return,

How to report income if it is paid in foreigncurrency,

How to determine your filing status if yourspouse is a nonresident alien, and

Who must pay estimated tax.

If you own stock in a foreign corporation orhave an interest in a foreign partnership, youmay have to file information returns. See theinstructions under Information Returns and Reports in chapter 1.

Withholding tax. Chapter 2 discusses thewithholding of income taxes and social secu-rity and Medicare taxes from the pay of U.S.citizens, resident aliens and nonresident al-iens. It will help you determine if the correctamounts of taxes are being withheld and howto adjust your withholding if too much or toolittle is being withheld.

Self-employment tax. If you are self-employed, you generally are required to payself-employment tax. Chapter 3 discusseswho must pay self-employment tax and whomay be exempt from self-employment tax.

Foreign earned income exclusion andhousing exclusion and deduction. Thereare income tax benefits that might apply if youmeet certain requirements while livingabroad. You may qualify to treat up to$70,000 of your income as not taxable by theUnited States. You may also be able to eitherdeduct part of your housing expenses fromyour taxable income, or treat a limited amountof income, used for housing expenses, as nottaxable by the United States. These benefitsare called the foreign earned income exclu-sion and the foreign housing deduction and

exclusion.To qualify for either of the exclusions orthe deduction, you must have a tax home ina foreign country and earn income in a foreigncountry. These rules are explained in chapter4.

If you are going to exclude or deduct yourincome as discussed above, you must fileForm 2555, Foreign Earned Income, or Form2555EZ, Foreign Earned Income Exclusion.You will find an example with filled-in Forms2555 and 2555EZ in this publication.

Exemptions, deductions and credits. U. S.citizens and resident aliens living outside theUnited States are generally allowed the sameexemptions, deductions and credits as thoseliving in the United States. However, if youchoose to exclude foreign earned income orhousing amounts, you cannot deduct or ex-clude any item or take credit for any item thatis related to the amounts you exclude. Amongthe topics discussed in chapter 5 are:

Exemptions you can claim,

Contributions you can deduct,

Moving expenses you can deduct, and

Foreign taxes you can either deduct ortake a credit for.

Tax treaty benefits. Chapter 6 discussessome benefits that are common to most taxtreaties and explains how to get help if youthink you are not getting a benefit to whichyou are entitled. It also explains how to getcopies of tax treaties.

How to get more information. Chapter 7has a brief explanation of how to get infor-mation (including forms and publications) andassistance from the IRS.

Questions and answers. Answers to fre-quently asked questions are presented in theback of the publication.

1.FilingInformation

TopicsThis chapter discusses:

Whether you have to file a return When to file your return and pay any tax

due

How to treat foreign currency Where to file your return Treating your nonresident spouse as a

resident

When you may have to make estimatedtax payments

Information returns and reports you mayhave to file

Useful ItemsYou may want to see:

Publication

3 Armed Forces' Tax Guide

501 Exemptions, Standard Deduction,and Filing Information

505 Tax Withholding and EstimatedTax

519 U.S. Tax Guide for Aliens

520 Scholarships and Fellowships

Form (and Instructions)

1040ES Estimated Tax for Individuals

1040X Amended U.S. Individual IncomeTax Return

2350 Application for Extension of TimeTo File U.S. Income Tax Return

2555 Foreign Earned Income

2555EZ Foreign Earned Income Exclu-sion

2688 Application for Additional Exten-sion of Time To File U.S. Individ-ual Income Tax Return

4868 Application for Automatic Exten-sion of Time To File U.S. Individ-ual Income Tax Return

5471 Information Return of U.S. Per-sons With Respect To CertainForeign Corporations

8822 Change of Address

SS5 Application for a Social SecurityCard

TD F 9022.1 Report of Foreign Bankand Financial Accounts

W7 Application for IRS IndividualTaxpayer Identification Number

See chapter 7 for information about get-ting these publications and forms.

Page 2 Chapter 1 Filing Information


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Filing RequirementsU.S. citizens and resident aliens living ortraveling outside the United States generallyare required to file income tax returns, estatetax returns, and gift tax returns and pay esti-mated tax in the same way as those residingin the United States.

Your income, filing status, and age gen-erally determine whether you must file a re-turn. Generally you must file a return for 1997if your gross income is at least the amountshown for your filing status in the followingtable:

Gross income. This includes all income youreceive in the form of money, goods, property,and services that is not exempt from tax.

In determining whether you must file areturn, you must consider as gross incomeany income that is excluded as foreign earnedincome or as a foreign housing amount. If youmust file a return and all or part of your in-come is excluded under these rules, you mustprepare Form 2555, discussed later. You maybe able to file Form 2555EZ if you areclaiming only the foreign earned income ex-clusion.

Self-employed individuals. If you areself-employed, your gross income includesthe amount on line 7 of Schedule C (Form1040), Profit or Loss From Business, or line1 of Schedule C-EZ (Form 1040), Net Profit From Business.

CAUTION

!If your net self-employment income is $400 or more, you must file a return even if your gross income is below the

amount for filing purposes listed above.

65 or older. You are considered 65 on theday before your 65th birthday. If your 65thbirthday is on January 1, you would be con-sidered 65 on December 31 of the previous

year.

When To File and PayIf you file on the calendar year basis, the duedate for filing your return is April 15 of thefollowing year. If you file on a fiscal year basis(a year ending on the last day of any monthexcept December), the due date is 3 monthsand 15 days after the close of your fiscal year.In general, the tax shown on your returnshould be paid by the due date of the return,without regard to any extension of time forfiling the return.

ExtensionsYou can be granted an extension of time tofile your return. In some circumstances, youcan also be granted an extension of time tofile and pay any tax due.

Automatic 2month extension. You areallowed an automatic 2month extension(until June 15, 1998, if you use a calendaryear) to file your 1997 return and pay anyfederal income tax that is due if you are a U.S,citizen or resident and on the regular due dateof the return (April 15, 1998, if you use acalendar year):

1) You are living outside of the UnitedStates and Puerto Rico, and your mainplace of business or post of duty is out-side the United States and Puerto Rico,or

2) You are in military or naval service onduty outside the United States andPuerto Rico.

However, if you pay the tax due after theregular due date, interest will be charged fromthe regular due date until the date the tax ispaid.

Service in a combat zone. If you servedin a combat zone or qualified hazardous dutyarea, see Extension of deadline in Publication3.

Married Taxpayers. If you file a joint re-turn, only one spouse has to qualify for theautomatic extension to apply. If you and yourspouse file separate returns, this automaticextension applies only to the spouse whoqualifies.

How to get the extension. To use thisautomatic 2month extension, you must at-tach a statement to your return explainingwhat situation (see the two listed earlier)qualified you for the extension.

Extensions beyond 2 months. If you areunable to file your return within the automatic2month extension period, you may be able

to get an additional 2month extension oftime to file your return, for a total of 4 months.This additional 2month extension of time

to file is not an extension of time to pay. SeeTime to pay not extended, later.

4month extension. If you are not able tofile your 1997 return by the due date, you maybe able to get an automatic 4month exten-sion of time to file. To get the automatic ex-tension, you must file Form 4868, Application for Automatic Extension of Time to File U.S.Individual Income Tax Return.

CAUTION

!You may not be eligible. You cannot use the automatic extension of time to file if:

You want the IRS to figure your tax, or You are under a court order to file by the

regular due date.

When to file. Generally, you must fileForm 4868 by April 15, 1998. If you are filinga fiscal year return, file Form 4868 by theregular due date for your return.

Concurrent extensions. If you qualify forthe 2month extension discussed above be-cause your tax home and abode are outsidethe United States and Puerto Rico, that ex-tension and the 4month extension run con-

currently (both extensions start at the sametime). You do not have to file Form 4868 untilthe new due date allowed by the first exten-sion, but the total combined extension will stillonly be 4 months from the regular due date.

Time to pay not extended. An extensionof time to file is not an extension of time topay. You must make an accurate estimate ofyour tax for 1997 and send any necessarypayment with your Form 4868. If you find youcannot pay the full amount due with Form4868, you can still get the extension. You willowe interest on the unpaid amount.

You also may be charged a penalty forpaying the tax late unless you have reason-able cause for not paying your tax when due.Interest and penalties are assessed (charged)from the original due date of the return, which,for most taxpayers, is April 15, 1998.

Extension beyond the 4 months. If youqualify for the 4month extension and youlater find that you are not able to file within the4month extension period, you may be ableto get 2 more months to file, for a total of 6months.

You can apply for an extension beyondthe 4month extension either by a letter to theIRS or by filing Form 2688, Application for Additional Extension of Time To File U.S. In- dividual Income Tax Return. You should re-quest the extension early so that, if refused,you still will be able to file on time. Except incases of undue hardship, Form 2688 or a re-quest by letter will not be accepted until youhave first used Form 4868 to get an automatic4month extension. Form 2688 or your letterwill not be considered if you file it after theextended due date.

To get an extension beyond the automatic4month extension, you must give all the fol-lowing information:

The reason for requesting the extension. The tax year to which the extension ap-

plies.

The length of time needed for the exten-sion.

Whether another extension for time to filehas already been requested for this taxyear.

You can sign the request for this extension,or it can be signed by your attorney, CPA,enrolled agent, or a person with a power ofattorney. If you are unable to sign the requestbecause of illness or for another good reason,a person in close personal or business re-lationship to you can sign the request.

Extension granted. If your application forthis extension is approved, you will be notifiedby the IRS. Attach the notice to your returnwhen you file it.

If an extension is granted and the IRS laterdetermines that the statements made on yourrequest for this extension are false or mis-leading and an extension would not havebeen granted at the time based on the truefacts, the extension is null and void. You willhave to pay the failure-to-file penalty.

Extension not granted. If your applica-tion for this extension is not approved, youmust file your return by the extended due dateof the automatic extension. You may be al-lowed to file within 10 days of the date of thenotice you get from the IRS if the end of the10day period is later than the due date. Thenotice will tell you if the 10day grace periodis granted.

Filing Status: Amount:Single ....................................................... $6,800

65 or older ........................................... $7,800Head of household .................................. $8,700

65 or older ........................................... $9,700Qualifying widow(er) ................................ $9,550

65 or older ........................................... $10,350Married filing jointly .................................. $12,200

Not living with spouse at end of year .. $2,650One spouse 65 or older ...................... $13,000Both spouses 65 or older .................... $13,800

Married filing separately .......................... $2,650

If you are the dependent of another taxpayer, see

the instructions for Form 1040 for more informationon whether you must file a return.

Chapter 1 Filing Information Page 3


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Further extensions. You generally cannotget an extension of more than 6 months.However, if you are outside the United Statesand meet certain tests, you may be able toget a longer extension. See Bona fide residence or physical presence test not yet met next.

Bona fide residence or physical presencetest not yet met. You can get an extensionof time to file your tax return if you need thetime to meet either the bona fide residencetest or the physical presence test to qualify forthe foreign earned income exclusion and/orthe foreign housing exclusion or deduction.The tests, the exclusions and the deductionare explained in Chapter 4, Foreign earned Income and Housing: Exclusion-Deduction.

You should request an extension if allthree of the following apply:

1) You are a U.S. citizen or resident;

2) You expect to meet either the bona fideresidence test or the physical presencetest, but not until after your tax return isdue; and

3) Your tax home is in a foreign country (orcountries) throughout your period ofbona fide residence or physical pres-

ence, whichever applies.Generally, if you are granted an extension,

it will be to 30 days beyond the date on whichyou can reasonably expect to qualify undereither the bona fide residence test or thephysical presence test. However, if you havemoving expenses that are for services per-formed in 2 years, you may be granted anextension to 90 days beyond the close of theyear following the year of first arrival in theforeign country.

How to get extension. To obtain an ex-tension, you should file Form 2350, Applica- tion for Extension of Time To File U.S. Indi- vidual Income Tax Return, with the InternalRevenue Service Center, Philadelphia, PA192550002, the local IRS representative orother IRS employee.

You must file Form 2350 by the due datefor filing your return. Generally, if both yourtax home and your abode are outside theUnited States and Puerto Rico on the regulardue date of your return and you file on a cal-endar year basis, the due date for filing yourreturn is June 15. An extension can begranted to a date after you expect to meet thetime requirements.

What if tests not met. If you obtain anextension of time and unforeseen eventsmake it impossible for you to satisfy either thebona fide residence test or the physicalpresence test, you should file your income taxreturn as soon as possible because you mustpay interest on any tax due after the regular

due date of the return (even though an ex-tension was granted).

CAUTION

!You should make any request for an extension early, so that if it is denied you still can file your return on time.

Otherwise, if you file late and additional tax is due, you may be subject to a penalty.

Return filed before test met. If you filea return before you meet the bona fide resi-dence test or the physical presence test, youmust include all gross income from both U.S.and foreign sources and pay the tax on thatincome. If you later qualify for the foreignearned income exclusion, the foreign housingexclusion, or the foreign housing deductionunder the bona fide residence or physical

presence rules, you can file a claim for refundof tax on Form 1040X. The refund will be thedifference between the amount of tax alreadypaid and the tax liability as figured after theexclusion or deduction.

Foreign CurrencyYou must express the amounts you report onyour U.S. tax return in U.S. dollars. If you re-ceive all or part of your income or pay someor all of your expenses in foreign currency,you must translate the foreign currency intoU.S. dollars. How you do this depends onyour functional currency. Your functional currency generally is the U.S. dollar unlessyou are required to use the currency of aforeign country.

You must make all federal income taxdeterminations in your functional currency.The U.S. dollar is the functional currency forall taxpayers except some qualified businessunits. A qualified business unit is a separateand clearly identified unit of a trade or busi-ness that maintains separate books and re-cords. Unless you are self-employed, yourfunctional currency is the U.S. dollar.

Even if you are self-employed and havea qualified business unit, your functional cur-rency is the dollar if any of the following apply:

You conduct the business in dollars. The principal place of business is located

in the United States. You choose to or are required to use the

dollar as your functional currency. The business books and records are not

kept in the currency of the economic en-vironment in which a significant part ofthe business activities is conducted.

If your functional currency is the U.S. dol-lar, you must immediately translate into dol-lars all items of income, expense, etc. (in-cluding taxes), that you receive, pay, oraccrue in a foreign currency and that will af-

fect computation of your income tax. Use theexchange rate prevailing when you receive,pay, or accrue the item. If there is more thanone exchange rate, use the one that mostproperly reflects your income. You can gen-erally get exchange rates from banks andU.S. Embassies.

If your functional currency is not the U.S.dollar, make all income tax determinations inyour functional currency. At the end of theyear, translate the results, such as incomeor loss, into U.S. dollars to report on your in-come tax return.

Blocked IncomeYou generally must report your foreign in-come in terms of U.S. dollars and, with oneexception (see Fulbright grants, later), youmust pay taxes due on it in U.S. dollars.

If, because of restrictions in a foreigncountry, your income is not readily convertibleinto U.S. dollars or into other money or prop-erty that is readily convertible into U.S. dol-lars, your income is blocked or deferrableincome. You can report this income in one oftwo ways:

1) Report the income and pay your federalincome tax with U.S. dollars that youhave in the United States or in someother country, or

2) Postpone the reporting of the incomeuntil it becomes unblocked.

If you choose to postpone the reportingof the income, you must file an informationreturn with your tax return. For this informa-tion return, you should use another Form1040 labeled Report of Deferrable ForeignIncome, pursuant to Rev. Rul. 74351. Youmust declare on the information return thatthe deferrable income will be included in tax-able income in the year that it becomes un-blocked. You also must state that you waiveany right to claim that the deferrable incomewas includible in income for any earlier year.

You must report your income on your in-formation return using the foreign currency inwhich you received that income. If you haveblocked income from more than one foreigncountry, include a separate information returnfor each country.

Income becomes unblocked and report-able for tax purposes when it becomes con-vertible, or when it is converted, into dollarsor into other money or property that is con-vertible into U.S. currency. Also, if you useblocked income for your personal expensesor dispose of it by gift, bequest, or devise, youmust treat it as unblocked and reportable.

If you have received blocked income onwhich you have not paid the tax, you shouldcheck to see whether that income is stillblocked. If it is not, you should take immediatesteps to pay the tax on it, file a declarationor amended declaration of estimated tax, andinclude the income on your tax return for theyear in which the income became unblocked.

If you choose to postpone reportingblocked income and in a later tax year youwish to begin including it in gross income al-though it is still blocked, you must obtain thepermission of the IRS to do so. To apply forpermission, you must file Form 3115, Appli- cation for Change in Accounting Method. Youalso must request permission from the IRSon Form 3115 if you have not chosen to deferthe reporting of blocked income in the past,but now wish to begin reporting blocked in-come under the deferred method. See theinstructions for Form 3115 for information.

Fulbright grants. All income must be re-ported in U.S. dollars. In most cases, the taxmust also be paid in U.S. dollars. If, however,at least 70% of your entire Fulbright grant hasbeen paid in nonconvertible foreign currency(blocked income), you can use the currencyof the host country to pay part of the U.S. taxthat is based on the blocked income. To de-termine the amount of the tax that you canpay in foreign currency get Publication 520.Details of these arrangements may also beobtained from the U.S. Educational Founda-tions or Commissions in foreign countries.

Where To FileIf any of the following situations apply to you,you should file your return with the:

Internal Revenue Service CenterPhiladelphia, PA 192550002.

1) You claim the foreign earned incomeexclusion.

2) You claim the foreign housing exclusionor deduction.

3) You claim the exclusion of income forbona fide residents of American Samoa.

4) You live in a foreign country or U.S.possession and have no legal residence



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or principal place of business in theUnited States.

The exclusions and the deduction are ex-plained in chapter 4.

If you do not know where your legal resi-dence is and you do not have a principalplace of business in the United States, youcan file with the Philadelphia Service Center.

However, you should not file with thePhiladelphia Service Center if you are a bonafide resident of the Virgin Islands or a residentof Guam or the Commonwealth of the North-ern Mariana Islands on the last day of yourtax year.

Resident of Virgin Islands.

If you are a bona fide resident of theVirgin Islands on the last day of yourtax year (even if your legal residence

or principal place of business is in the UnitedStates), you must file your return with and payyour tax on income you have from all sourcesto the:

Virgin Islands Bureau of Internal Revenue9601 Estate ThomasCharlotte AmalieSt. Thomas, Virgin Islands 00802.

Non-Virgin Islands resident with Virgin Is-lands Income. If you are a U.S. citizen orresident and you have income from sourcesin the Virgin Islands or income effectivelyconnected with the conduct of a trade orbusiness in the Virgin Islands, and you arenot a bona fide resident of the Virgin Islandson the last day of your tax year, you must fileidentical tax returns with the United Statesand the Virgin Islands. File the original returnwith the United States and file a copy of theU.S. return (including all attachments, forms,and schedules) with the Virgin Islands Bureauof Internal Revenue.

The amount of tax you must pay to theVirgin Islands is figured by the followingcomputation:

Total tax on U.S. return(after certain adjustments)

V.I. AGI

Worldwide A.G.I

Form 8689, Allocation of Individual Income Tax to the Virgin Islands, is used for thiscomputation. You must complete this formand attach it to your return. You should payany tax due to the Virgin Islands when you fileyour return with the Virgin Islands Bureau ofInternal Revenue.

You should file your U.S. return with theInternal Revenue Service Center, Philadel-phia, PA 192550002.

Resident of Guam.

If you are a resident of Guam on thelast day of your tax year, you shouldfile a return with Guam and pay your

tax on income you have from all sources tothe:

Department of Revenue and TaxationGovernment of GuamP.O. Box 23607GMF, GU 96921

However, if you are a resident of theUnited States on the last day of your tax year,you should file a return with the United Statesand pay your tax on income you have fromall sources to the Internal Revenue ServiceCenter, Philadelphia, PA 192550002.

See Publication 570, Tax Guide for Indi- viduals With Income From U.S. Possessions,for information about the filing requirementsfor residents of Guam.

Resident of the Commonwealth of theNorthern Mariana Islands.

If you are a resident of the Common-wealth of the Northern Mariana Is-lands on the last day of your tax year,

you should file a return with the NorthernMariana Islands and pay your tax on incomeyou have from all sources to the:

Division of Revenue and TaxationCommonwealth of the Northern MarianaIslandsP.O. Box 5234, CHRBSaipan, MP 96950.

However, if you are a resident of theUnited States on the last day of your tax year,you should file a return with the United Statesand pay your tax on income you have fromall sources to the Internal Revenue ServiceCenter, Philadelphia, PA 192550002.

See Publication 570 for information aboutthe filing requirements for residents of theCommonwealth of the Northern Mariana Is-lands.

Terrorist or Military ActionU.S. income taxes are forgiven for U.S. Gov-ernment military or civilian employees whodie as a result of wounds or injuries sustainedoutside the United States in a terrorist or mil-itary action directed against the United Statesor its allies. The taxes are forgiven for thedeceased employee's tax years beginningwith the year immediately before the year inwhich the injury or wounds were incurred andending with the year of death.

If the deceased government employeeand the employee's spouse had a joint in-come tax liability for those years, the tax mustbe divided between the spouses to determinethe amount forgiven.

For more information on how to have thetax forgiven or how to claim a refund of taxalready paid, see Publication 559, Survivors,Executors, and Administrators.

Nonresident SpouseTreated as a ResidentIf, at the end of your tax year, you are marriedand one spouse is a U.S. citizen or a residentalien and the other spouse is a nonresidentalien, you can choose to treat the nonresidentspouse as a U.S. resident. This includes sit-uations in which one spouse is a nonresidentalien at the beginning of the tax year, but aresident alien at the end of the year, and theother spouse is a nonresident alien at the endof the year.

If you make this choice, the following tworules apply.

1) You and your spouse are treated, forincome tax purposes, as residents forall tax years that the choice is in effect.

2) You must file a joint income tax return forthe year you make the choice.

This means that neither you nor your spousecan claim tax treaty benefits as a resident ofa foreign country for a tax year for which thechoice is in effect. You and your spouse can

file joint or separate returns in years after theyear in which you make the choice.

Example 1. Pat Smith has been a U.S.citizen for many years. She is married toNorman, a nonresident alien. Pat and Normanmake the choice to treat Norman as a resi-dent alien by attaching a statement to their

joint return. Pat and Norman must report theirworldwide income for the year they make thechoice and for all later years unless thechoice is ended or suspended. Although Patand Norman must file a joint return for theyear they make the choice, they can file either

joint or separate returns for later years.

Example 2. Bob and Sharon Williams aremarried and both are nonresident aliens. InJune of last year, Bob became a resident al-ien and remained a resident for the rest of theyear. Bob and Sharon both choose to betreated as resident aliens by attaching astatement to their joint return for last year.Bob and Sharon must report their worldwideincome for last year and all later years unlessthe choice is ended or suspended. Bob andSharon must file a joint return for last year,but they can file either joint or separate re-turns for later years.

Social Security Number(SSN)If your spouse is a nonresident alien and youfile a joint or separate return, your spousemust have either an SSN or an individualtaxpayer identification number (ITIN).

To get a social security number for yourspouse, apply at a social security office orU.S. consulate. You must complete FormSS5, Application For A Social Security Card.You must also provide original or certifiedcopies of documents to verify your spouse'sage, identity, and citizenship.

If your spouse is not eligible to get anSSN, he or she can file Form W7 with theIRS to apply for an ITIN.

How To Make the ChoiceAttach a statement, signed by both spouses,to your joint return for the first tax year forwhich the choice applies. It should contain thefollowing:

1) A declaration that one spouse was anonresident alien and the other spousea U.S. citizen or resident alien on the lastday of your tax year, and that youchoose to be treated as U.S. residentsfor the entire tax year, and

2) The name, address, and social securitynumber (or individual taxpayer identifi-cation number) of each spouse. (If one

spouse died, include the name and ad-dress of the person making the choicefor the deceased spouse.)

You generally make this choice when youfile your joint return. However, you can alsomake the choice by filing a joint amendedreturn on Form 1040 or Form 1040A. Be sureto write the word Amended across the topof the amended return. If you make the choicewith an amended return, you and your spousemust also amend any returns that you mayhave filed after the year for which you madethe choice.

You generally must file the amended jointreturn within 3 years from the date you filedyour original U.S. income tax return or 2 years

Chapter 1 Filing Information Page 5


6/43

from the date you paid your income tax forthat year, whichever is later.

Suspending the ChoiceThe choice to be treated as a resident aliendoes not apply to any tax year (after the taxyear you made the choice) if neither spouseis a U.S. citizen or resident alien at any timeduring the tax year.

Example. Dick Brown was a resident al-ien on December 31, 1994, and married toJudy, a nonresident alien. They chose to treatJudy as a resident alien and filed joint 1994and 1995 income tax returns. On January 10,1996, Dick became a nonresident alien. Judyhad remained a nonresident alien throughoutthe period. Dick and Judy can file joint orseparate returns for 1996. However, sinceneither Dick nor Judy is a resident alien at anytime during 1997, their choice is suspendedfor that year. If either has U.S. source incomeor foreign source income effectively con-nected with a U.S. trade or business in 1997,they must file separate returns as nonresidentaliens. If Dick becomes a resident alien againin 1998, their choice is no longer suspended.For years their choice is not suspended, theymust include income received from sources

both in and outside the United States in theirincome for each tax year.

Ending the ChoiceOnce made, the choice to be treated as aresident applies to all later years unless sus-pended (as explained above) or ended in oneof the following ways.

1) Revocation. Either spouse can revokethe choice for any tax year, provided heor she makes the revocation by the duedate for filing the tax return for that taxyear. The spouse who revokes must at-tach a signed statement declaring thatthe choice is being revoked. The state-

ment must include the name, address,and social security number (or individualtaxpayer identification number) of eachspouse. Include the name and addressof any person who is revoking the choicefor a deceased spouse. The statementalso must include a list of any states,foreign countries, and possessions thathave community property laws in whicheither spouse is domiciled or where realproperty is located from which eitherspouse receives income. File the state-ment as follows:

a) If the spouse revoking the choicemust file a return, attach the state-ment to the return for the first yearthe revocation applies,

b) If the spouse revoking the choicedoes not have to file a return, butdoes file a return (for example, toobtain a refund), attach the state-ment to the return, or

c) If the spouse revoking the choicedoes not have to file a return anddoes not file a claim for refund,send the statement to the InternalRevenue Service Center where thelast joint return was filed.

2) Death. The death of either spouse endsthe choice, beginning with the first taxyear following the year the spouse died.However, if the surviving spouse is a

U.S. citizen or resident and is entitled tothe joint tax rates as a surviving spouse,the choice will not end until the close ofthe last year for which these joint ratesmay be used. If both spouses die in thesame tax year, the choice ends on thefirst day after the close of the tax year inwhich the spouses died.

3) Legal separation. A legal separationunder a decree of divorce or separatemaintenance ends the choice as of thebeginning of the tax year in which thelegal separation occurs.

4) Inadequate records. The Internal Rev-enue Service can end the choice for anytax year that either spouse has failed tokeep adequate books, records, andother information necessary to determinethe correct income tax liability, or toprovide adequate access to those re-cords.

If the choice is ended for any of thesereasons, neither spouse can make a choicein any later tax year.

T I PIf you do not choose to treat your nonresident spouse as a U.S. resident, you may be able to use head

of household filing status. To use this status you must pay more than half the cost of maintaining a household for certain dependents or relatives other than your nonresident alien spouse. For more information, see Publication 501.

Estimated TaxThe requirements for determining who mustpay estimated tax are the same for a U.S.citizen or resident abroad as for a taxpayer inthe United States. For current instructions onmaking your estimated tax payments, seeForm 1040ES.

If you had a tax liability for 1997, you mayhave to pay estimated tax for 1998. Gener-ally, you must make estimated tax paymentsfor 1998 if you expect to owe at least $1,000in tax for 1998, after subtracting your with-holding and credits, and you expect yourwithholding and credits to be less than thesmaller of:

1) 90% of the tax to be shown on your 1998tax return, or

2) 100% of the tax shown on your 1997 taxreturn. (The return must cover all 12months.)

If less than two thirds of your gross incomefor 1997 or 1998 is from farming or fishingand your adjusted gross income for 1997 ismore than $150,000 ($75,000 if you aremarried and file separately), substitute 110%for 100% in (2) above.

The first installment of estimated tax isusually due on April 15 of the tax year. SeePublication 505 for more information.

When figuring your estimated gross in-come, subtract amounts you expect to ex-clude under the foreign earned income ex-clusion and the foreign housing exclusion. Inaddition, you can reduce your income by yourestimated foreign housing deduction. How-ever, if the actual amount of the exclusion ordeduction is less than you estimate, you mayhave to pay a penalty on the underpaymentof estimated tax.

Information Returnsand ReportsIf you acquire or dispose of stock in a foreigncorporation, own a controlling interest in aforeign corporation, or acquire or dispose ofany interest in a foreign partnership, you mayhave to file an information return. You alsomay have to file an information return if youtransfer property to a foreign trust, or if you

have transferred property to a foreign trustwith at least one U.S. beneficiary. You mayhave to file reports if you ship currency to orfrom the United States or if you have an in-terest in a foreign bank or financial account.

Form 5471. Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations, must generally be filedby U.S. shareholders of controlled foreigncorporations and by shareholders, officers,and directors of foreign personal holdingcompanies. Form 5471 must be filed by offi-cers, directors, and shareholders of U.S. en-tities that acquire, dispose of, or are involvedin the reorganization of a foreign corporation.

You must file Form 5471 at the time youfile your income tax return. More informationabout the filing of Form 5471 can be found inthe instructions for this information return.

Form 3520. Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, is used toreport:

The creation of a foreign trust or a director indirect transfer to a foreign trust by aU.S. person, including the executor of anestate,

Distributions received from a foreign trust,

Gifts or bequests received from a non-

resident alien or foreign estate that totalmore than $100,000,

Gifts or bequests received from a foreigncorporation or foreign partnership thattotal more than $10,276, and

The annual information return for a U.S.person treated as the owner of any partof the assets of a foreign trust. This in-formation was previously reported onForm 3520A, Annual Return of Foreign Trust With U.S. Beneficiaries. Form3520A is now used by foreign trusts tosatisfy their annual information reportingrequirements.

You must file the form with your incometax return by the due date (including exten-sions) of your return and send a copy of theform to the Internal Revenue Service Center,Philadelphia, PA 192550002.

Form 4790. Form 4790, Report of Interna- tional Transportation of Currency or Monetary Instruments, must be filed by each personwho physically transports, mails, ships, orcauses to be physically transported, mailed,or shipped, currency or other monetary in-struments totaling more than $10,000 at onetime from the United States to any place out-side the United States, or into the UnitedStates from any place outside the UnitedStates. The filing requirement also applies toeach person who attempts to transport, mail,



7/43

or ship the currency or monetary instrumentsor attempts to cause them to be transported,mailed, or shipped.

The term monetary instruments includescoin and currency of the United States or ofany other country, money orders, traveler'schecks, investment securities in bearer formor otherwise in such form that title passesupon delivery, and negotiable instruments(except warehouse receipts or bills of lading)in bearer form or otherwise in such form thattitle passes upon delivery. The term includesbank checks, and money orders that aresigned, but on which the name of the payeehas been omitted. The term does not includebank checks, or money orders made payableto the order of a named person that have notbeen endorsed or that bear restrictiveendorsements.

A transfer of funds through normal bank-ing procedures (wire transfer) which does notinvolve the physical transportation of currencyor bearer monetary instruments is not re-quired to be reported on Customs Form 4790.

Filing requirements for Customs Form4790 are the following:

Recipients. Each person who receivescurrency or other monetary instruments froma place outside the United States for which areport has not been filed by the shipper mustfile Customs Form 4790.

It must be filed within 15 days afterreceipt with the Customs officer incharge at any port of entry or depar-

ture, or by mail with the:

Commissioner of CustomsAttention: Currency TransportationReports1301 Constitution Ave., N.W.Washington, DC 20229.

Shippers or mailers. If the currency orother monetary instrument does not accom-pany a person entering or departing theUnited States, Customs Form 4790 can befiled by mail with the Commissioner of Cus-toms at the above address. It must be filedby the date of entry, departure, mailing, orshipping.

Travelers. Travelers must file CustomsForm 4790 with the Customs officer in chargeat any Customs port of entry or departurewhen entering or departing the United States.

Penalties. Civil and criminal penalties areprovided for failure to file a report or if thereport contains material omissions or mis-statements, and for structuring the transpor-tation of currency or monetary instruments toavoid filing a report. Also, the entire amountof the currency or monetary instrument maybe subject to seizure and forfeiture.

More information about the filing of Cus-

toms Form 4790 can be found in the in-structions on the back of the form.

Form TD F 9022.1. Form TD F 9022.1,Report of Foreign Bank and Financial Ac- counts, must be filed if you had any financialinterest in, or signature or other authorityover, a bank, securities, or other financialaccount in a foreign country. You do not haveto file the report if the assets are with a U.S.military banking facility operated by a U.S. fi-nancial institution or if the combined assetsin the account(s) are $10,000 or less duringthe entire year.

You must file this form by June 30 eachyear with the Department of the Treasury at

the address shown on the form. Form TD F9022.1 is not a tax return, so do not attachit to your Form 1040.

2.

Withholding TaxTopicsThis chapter discusses:

Withholding income tax from the pay ofU.S. citizens

Withholding income tax from the pay ofnonresident aliens

Social security and Medicare taxes


Publication

505 Tax Withholding and EstimatedTax


673 Statement for Claiming BenefitsProvided by Section 911 of theInternal Revenue Code

W4 Employee's Withholding Allow-ance Certificate


WithholdingU.S. employers generally must withhold U.S.income tax from the pay of U.S. citizens per-forming services in a foreign country unlessthe employer is required by foreign law towithhold foreign income tax from the pay.

Your employer, however, is not requiredto withhold U.S. income tax from the portionof your wages earned abroad that are equalto the foreign earned income exclusion andforeign housing exclusion if your employerhas good reason to believe that you willqualify for these exclusions.

Statement. You can submit a statement toyour employer indicating that you will meeteither the bona fide residence test or thephysical presence test and indicating yourestimated housing cost exclusion.

You can obtain sample copies of anacceptable statement (Form 673,Statement For Claiming Benefits Pro-

vided by Section 911 of the Internal Revenue Code) by writing to the

Internal Revenue ServiceAssistant Commissioner (International)Attn: CP:IN:D:CS950 L'Enfant Plaza South, S.W.,Washington, DC 20024.

You do not have to use the form. You canprepare your own statement. See the nextpage for a copy of Form 673.

You must submit the statement to youremployer and not to the IRS.

Generally, filing a signed statement thatincludes a declaration under penalties ofperjury is considered authority for your em-ployer to discontinue withholding. However,if your employer has reason to believe thatyou will not qualify for an exclusion of income,your employer must disregard the statementand withhold the tax.

Your employer is not required to find outabout amounts you received from any othersource. But, if your employer has such infor-mation, it must be considered in determiningwhether your earned income is more than thelimit on the exclusion.

Your employer, however, should withholdtaxes from any wages you earn in the UnitedStates.

Foreign tax credit. If you plan to take a for-eign tax credit, you may be eligible for addi-tional withholding allowances on Form W4,Employee's Withholding Allowance Certif- icate. You can take these additional with-holding allowances only for foreign tax creditsattributable to taxable salary or wageincome. See Publication 505 for further infor-mation.

Withholding from pension payments. U.S.payers of benefits from employer deferredcompensation plans, individual retirementplans, and commercial annuities generallymust withhold income tax from the paymentsor distributions. Withholding will apply unlessyou choose exemption from withholding. Youcannot choose exemption unless you providethe payer of the benefits with a residenceaddress in the United States or a U.S. pos-session, or unless you certify to the payer that

you are not a U.S. citizen or resident alien orsomeone who left the United States to avoidtax.

Checking your withholding. Before youreport how much U.S. income tax was with-held on your 1997 return, you should carefullyreview all information documents, such asForm W2 and Form 1099. Compare otherrecords, such as final pay records or bankstatements, with Form W2 or Form 1099 toverify the withholding on these forms. Youcan use the following chart to help you locatethe U.S. income tax withholding box on eachform.

Check your U.S. income tax withholding evenif you pay someone else to prepare your taxreturn. You may be assessed penalties andinterest if you claim more than your correctamount of withholding.

WHERE TO FIND WITHHOLDING

FORM NUMBER BOX NUMBERW2 ................................................. 2W2G .............................................. 2W2C .............................................. 21099INT ........................................ 41099DIV ........................................ 21099B ........................................... 41099OID ........................................ 41099PATR ..... .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . 41099MISC ... .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. 41099G ........................................... 41099R ........................................... 4

Chapter 2 Withholding Tax Page 7


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673Statement For Claiming Benefits Provided

by Section 911 of the Internal Revenue Code

Form OMB No. 1545-1022

(Rev. March 1997)

Department of t he Treasury Internal Revenue Service

(See Instructions on Reverse)

The following statement, when completed and furnished by a citizen of the United States to his or her employer, permits the employer toexclude from income tax withholding all or a part of the wages paid for services performed outside the United States.

Name (please print) Social security number

I expect to qualify for the foreign earned income exclusion under either the bona fide residence or physical presence test for calendaryear or fiscal year beginning and ending .

Please check applicable box

Bona Fide Residence TestI am a citizen of the United States. I have been a bona fide resident of and my tax home has been located in

(foreign country or countries) for an uninterrupted period which includes an entiretax year that began on ,19 .

I expect to remain a bona fide resident and retain my tax home in a foreign country (or countries) until the end of the tax year for whichthis statement is made. Or if not that period, from the date of this statement until , 19 .

I have not stated to the authorities of any foreign country named above that I an not a resident of that country. Or, if I made such astatement, the authorities of that country thereafter made a determination to the effect that I am a resident of that country.

Based on the facts in my case, I have good reason to believe that for this period of foreign residence I will satisfy the tax home and thebona fide foreign residence requirements prescribed by the section 911(d)(1)(A) of the Internal Revenue Code and qualify for the exclusion Codesection 911(a) allows.

(date)

(date within tax year)

Physical Presence TestI am a citizen of the United States. Except for occasional absences that wont disqualify me for the benefit of section 911(a) of the Internal

Revenue Code, I expect to be present in and maintain my tax home in (foreign country or countries) fora 12-month period that includes the entire tax year . Or, if not the entire year, for the part of the tax year beginning on

,19 , and ending on , 19 .

Based on the facts in my case, I have good reason to believe that for this period of presence in a foreign country or countries, I willsatisfy the tax home and the 330 full-day requirements within a 12-month period under section 911(d)(1)(B).

Estimated Housing Cost

(1) Rent(2) Utilities (other than telephone Charges)(3) Real & Personal Property Insurance(4) Occupancy tax not deductible under section 164(5) Nonrefundable fees paid for securing a leasehold(6) Household Repairs(7) Add lines 1 through 6(8) Estimated Base Housing Amount for my qualifying period is(9) Subtract line 8 from line 7. This is your estimated housing cost amount

I understand that this total, plus the total reported on any other statements outstanding with other employers, should not be more thanmy expected housing cost amount exclusion.If I become disqualified for the exclusions, I will immediately notify my employer and advise what part, if any, of the period I am qualified

for.I understand that any exemption form income tax withholding permitted by reason of furnishing this statement is not a determination by

the Internal Revenue that any amount paid to me for any services performed during the tax year is excludable form gross income under theprovisions of Code section 911(a).

Your Signature Date

Cat. No. 10183Y Form 673 Page 1 (Rev. 03-97)

Page 8 Chapter 2 Withholding Tax


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30% Flat RateWithholdingGenerally, U.S. payers of certain fixed or de-terminable annual or periodic income are re-quired to withhold tax at a flat 30% (or lowertreaty) rate on payments of this income tononresident aliens. If you are a U.S. citizenor resident and this tax is withheld in errorfrom payments to you because you have a

foreign address, you should notify the payerof the income to stop the withholding.To do this, you must give the payer a

written statement in duplicate stating that youare a citizen or resident of the United States.If you are a resident alien, you can claim U.S.residence by filing Form 1078, Certificate of Alien Claiming Residence in the United States, in duplicate with the payer.

You can claim the tax withheld in error asa credit on your tax return if the amount is notadjusted by the payer of the income.

Social Securityand Medicare TaxesSocial security and Medicare taxes may applyto wages paid to an employee regardless ofwhere the services are performed.

GeneralIn general, U.S. social security and Medicaretaxes apply to payments of wages for ser-vices performed as an employee:

1) Within the United States, regardless ofthe citizenship or residence of either theemployee or the employer,

2) Outside the United States on or in con-nection with an American vessel or air-craft, regardless of the citizenship orresidence of either the employee or theemployer, provided that either:

a) The employment contract is enteredinto within the United States, or

b) The vessel or aircraft touches at aU.S. port while the employee isemployed on it,

3) Outside the United States, as providedby an applicable binational social security agreement (discussed later),

4) Outside the United States by a U.S. citi-

zen or a U.S. resident alien for anAmerican employer (defined later), or

5) Outside the United States by a U.S. citi-zen or U.S. resident alien for a foreignaffiliate of an American employer undera voluntary agreement entered into be-tween the American employer and theU.S. Treasury Department.

American vessel or aircraft. An Americanvessel is any vessel documented or num-bered under the laws of the United States,and any other vessel whose crew is employedsolely by one or more U.S. citizens or resi-dents or U.S. corporations. An American air-

craft is an aircraft registered under the lawsof the United States.

American employer. An American employerincludes any of the following:

1) The U.S. Government or any of its in-strumentalities,

2) An individual who is a resident of theUnited States,

3) A partnership of which at least two-thirdsof the partners are U.S. residents,

4) A trust of which all the trustees are U.S.residents, or

5) A corporation organized under the lawsof the United States, any U.S. state, orthe District of Columbia, Puerto Rico, theVirgin Islands, Guam, or American Sa-moa.

Foreign affiliate. A foreign affiliate of anAmerican employer is any foreign entity inwhich the American employer has at least a10% interest, directly or through one or moreentities. For a corporation, the 10% interest

must be in its voting stock, and for any otherentity the 10% interest must be in its profits.Form 2032, Contract Coverage Under Ti-

tle II of the Social Security Act, is used byAmerican employers to extend social securitycoverage to U.S. citizens and residentsworking abroad for foreign affiliates of theAmerican employers. Coverage under anagreement in effect on or after June 15, 1989,cannot be terminated.

Excludable meals and lodging. Social se-curity tax does not apply to the value of mealsand lodging provided to you for the conven-ience of your employer and excluded fromyour income.

Binational Social Security(Totalization) AgreementsThe United States has entered into agree-ments with several foreign countries to coor-dinate social security coverage and taxationof workers who are employed in one of thecountries. These agreements are commonlyreferred to as totalization agreements.Agreements are in effect with the followingcountries:

Austria, Belgium, Canada, Finland, France, Germany, Greece Ireland, Italy, Luxembourg, The Netherlands, Norway, Portugal,

Spain,

Sweden,

Switzerland, and

The United Kingdom

Under these agreements, dual coverage anddual contributions (taxes) for the same workare eliminated. The agreements generallymake sure that social security taxes are paidonly to one country.

Generally, under these agreements, youwill only be subject to social security taxes inthe country where you are working. However,if you are temporarily sent to work in a foreigncountry, and your pay would otherwise besubject to social security taxes in both theUnited States and that country, you generallycan remain covered only by U.S. social se-curity. More information on any specificagreement can be obtained by contacting theUnited States Social Security Administration.

To establish that your pay in a foreigncountry is subject only to U.S. socialsecurity tax and is exempt from for-

eign social security tax, your employer in theUnited States should write to the:

U.S. Social Security AdministrationOffice of International PolicyPost Office Box 17741Baltimore, MD 21235.

Your employer should include the follow-ing information in the letter:

1) Your name,

2) Your U.S. social security number,

3) Your date and place of birth,

4) The country of which you are a citizen,

5) The country of your permanent resi-dence,

6) The name and address of your employerin the United States and in the foreigncountry,

7) The date and place you were hired, and

8) The beginning date and the expectedending date of your employment in theforeign country.

If you are permanently working in a foreigncountry with which the United States has asocial security agreement and your pay isexempt under the agreement from U.S. socialsecurity tax, you or your employer should geta statement from the authorized official oragency of the foreign country verifying thatyour pay is subject to social security coveragein that country.

If the authorities of the foreign country willnot issue such a statement, either you or youremployer should get a statement from theU.S. Social Security Administration, Office ofInternational Policy, at the above address,that your wages are not covered by the U.S.social security system.

This statement should be kept by youremployer because it establishes that your payis exempt from U.S. social security tax. Onlywages paid on or after the effective date ofthe agreement can be exempt from U.S. so-cial security tax.

Chapter 2 Withholding Tax Page 9


10/43

3.Self-EmploymentTax


Who must pay self-employment tax Who is exempt from self-employment tax


Publication

533 Self-Employment Tax

517 Social Security and Other Infor-mation for Members of the Clergy

and Religious WorkersForm (and Instructions)

Schedule SE Self-Employment Tax

Form 4361 Application for ExemptionFrom Self-Employment Tax forUse by Ministers, Members ofReligious Orders and ChristianScience Practitioners

Form 1040PR

Form 1040SS

See chapter 7 for information about get-ting these publications.

Who Must PaySelf-Employment Tax?If you are a self-employed U.S. citizen orresident abroad, other than a U.S. citizenemployee of an international organization,foreign government, or wholly owned instru-mentality of a foreign government, you gen-erally are subject to the self-employment tax.This is a social security and Medicare tax onnet earnings from self-employment of $400or more a year. For 1997 the tax is on netearnings of $400 or more up to $65,400 forthe social security portion. All net earningsare subject to the Medicare portion. Your netself-employment income is used to figure yournet earnings from self-employment. Net self-employment income usually includes allbusiness income less all business deductionsallowed for income tax purposes. Netearnings from self-employment is a portionof net self-employment income. This amountis figured on Short Schedule SE (Section A),line 4, or Long Schedule SE (Section B), line6. The actual self-employment tax is figuredon net earnings from self-employment.

Employed by a U.S. church. If you wereemployed by a U.S. church or a qualifiedchurch-controlled organization that chose ex-

emption from social security and Medicaretaxes, and you received wages of $108.28or more from the organization, the amountspaid to you are subject to the self-employment tax. However, you can chooseto be exempt from social security and Medi-care taxes if you are a member of a recog-nized religious sect. See Publication 533.

Effect of exclusion. You must take all ofyour self-employment income into account infiguring your net earnings from self-employment, even though the income is ex-empt from income tax because of the foreignearned income exclusion.

Example. You are in business abroad asa consultant and qualify for the foreign earnedincome exclusion. Your foreign earned in-come is $95,000, your business deductionstotal $27,000, and your net profit is $68,000.You must pay social security tax and Medi-care tax on your net earnings even thoughyou can exclude all of your earned income.

Optional method. You can use the nonfarmoptional method if you are self-employed andyour net nonfarm profits are less than $1,733and less than 72.189% of your gross nonfarmincome. You must have had $400 of netself-employment earnings in at least 2 of the3 immediately preceding tax years. You can-not choose to report less than your actual netearnings from nonfarm self-employment. Youcannot use the nonfarm optional method formore than 5 tax years. Use Long ScheduleSE (Section B). For more details get Publi-cation 533.

Members of the clergy. Although membersof the clergy may be employees in performingtheir ministerial services, they are treated asself-employed for self-employment tax pur-poses. Their U.S. self-employment tax isbased upon net earnings from self-employment figured without regard to theforeign earned income exclusion or the for-eign housing exclusion.

Members of the clergy are covered auto-matically by social security and Medicare.You can receive exemption from coverage foryour ministerial duties if you conscientiouslyoppose public insurance due to religious rea-sons or if you oppose it due to the religiousprinciples of your denomination. You must fileForm 4361, Application for Exemption From Self-Employment Tax for Use by Ministers,Members of Religious Orders and Christian Science Practitioners, to apply for this ex-emption.

This subject is discussed in further detail

in Publication 517.

Puerto Rico, Guam, Commonwealth of theNorthern Mariana Islands, American Sa-moa, or Virgin Islands. If you are a U.S.citizen or resident and own and operate abusiness in Puerto Rico, Guam, the Com-monwealth of the Northern Mariana Islands,American Samoa, or the Virgin Islands, youmust pay tax on net earnings from self-employment (if it is $400 or more) from thosesources. You must pay the self-employmenttax whether or not the income is exempt fromU.S. income taxes (or whether or not you

must otherwise file a U.S. income tax return).Unless your situation is described below, at-tach Schedule SE (Form 1040) to your U.S.income tax return.

If you do not have to file Form 1040 withthe United States and you are a resident of:

Guam,

American Samoa,

The Virgin Islands,

The Commonwealth of the NorthernMariana Islands, or

Puerto Rico,

figure your self-employment tax on eitherForm 1040PR or Form 1040SS, whicheverapplies.

You must file these forms with the InternalRevenue Service Center, Philadelphia, PA192550002.

ExemptionThe United States may reach agreementswith foreign countries to eliminate dual cov-erage and dual contributions (taxes) to socialsecurity systems for the same work. SeeBinational Social Security (Totalization)Agreements in chapter 2 under Social Secu- rity and Medicare Taxes. As a general rule,self-employed persons who are subject todual taxation will only be covered by the so-cial security system of the country where theyreside. For more information on how anyspecific agreement affects self-employedpersons, contact the United States SocialSecurity Administration.

If you are a U.S. citizen permanentlyworking in a foreign country with which theUnited States has a social security agreementand you are exempt under the agreementfrom U.S. self-employment tax, you shouldget a statement from the authorized officialor agency of the foreign country verifying thatyou are subject to social security coverage inthat country.

If the authorities of the foreign countrywill not issue a statement, you shouldget a statement that your earnings are

not covered by the U.S. social security sys-tem from the

U.S. Social Security AdministrationOffice of International PolicyPost Office Box 17741Baltimore, MD 21235.

Attach a photocopy of either statement toyour federal income tax return each year youare exempt. Also enter Exempt, see attachedstatement, on the line for self-employmenttax on your return.

If you believe that your self-employmentearnings should be exempt from foreign so-cial security tax and subject only to U.S.self-employment tax, you should request acertificate of coverage from the United StatesSocial Security Administration, Office ofInternational Policy. The certificate will es-tablish your exemption from the foreign socialsecurity tax.

Page 10 Chapter 3 Self-Employment Tax


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4 .Foreign EarnedIncome andHousing:

Exc lusion -Deduction


Who qualifies for the foreign earned in-come exclusion, the foreign housing ex-clusion, or the foreign housing deduction

How to figure the foreign earned incomeexclusion

How to figure the foreign housing exclu-sion and the foreign housing deduction


Publication

519 U.S. Tax Guide for Aliens

596 Earned Income Credit


1040X Amended U.S. Individual IncomeTax Return

2555 Foreign Earned Income

2555EZ Foreign Earned Income Exclu-sion


Who Qualifies for theExclusions and theDeduction?If you meet certain requirements, you mayqualify for the foreign earned income andforeign housing exclusions and the foreignhousing deduction.

If you are a U.S. citizen or a resident alienof the United States and live abroad, you aretaxed on your worldwide income. However,you may qualify to exclude up to $70,000 ofyour foreign earned income. In addition, youcan exclude or deduct certain foreign housingamounts. See Foreign Earned Income Exclu- sion and Foreign Housing Exclusion or De- duction, later.

You may also be entitled to exclude fromincome the value of meals and lodging pro-vided to you by your employer. See Exclusion of Meals and Lodging, later.

RequirementsTo claim the foreign earned income exclusion,the foreign housing exclusion, or the foreignhousing deduction, you must have foreignearned income, your tax home must be in aforeign country, and you must be one of thefollowing:

A U.S. citizen who is a bona fide residentof a foreign country or countries for an

uninterrupted period that includes an en-tire tax year,

A U.S. resident alien who is a citizen ornational of a country with which theUnited States has an income tax treatyin effect and who is a bona fide residentof a foreign country or countries for anuninterrupted period that includes an en-tire tax year, or

A U.S. citizen or a U.S. resident alien whois physically present in a foreign countryor countries for at least 330 full daysduring any period of 12 consecutivemonths.

See Publication 519, U.S. Tax Guide for

Aliens, to find out if you qualify as a U.S.resident alien for tax purposes and whetheryou keep that alien status when you tempo-rarily work abroad.

If you are a nonresident alien, your spouseis a U.S. citizen or resident, and you bothchoose to be treated as U.S. residents for taxpurposes, you are considered a resident al-ien. For information on making the choice,see the discussion in Chapter 1 under Non- resident Spouse Treated as a Resident.

Waiver of minimum time requirements.The minimum time requirements for the bonafide residence test and the physical presencetest can be waived if you must leave a foreigncountry because of war, civil unrest, or similar

adverse conditions in that country. See thediscussion later under Waiver of Time Re- quirements.

Tax Homein Foreign CountryTo qualify for the foreign earned income ex-clusion, the foreign housing exclusion, or theforeign housing deduction, your tax homemust be in a foreign country throughout yourperiod of bona fide residence or physicalpresence abroad. Bona fide residence andphysical presence are explained later.

Tax HomeYour tax home is the general area of yourmain place of business, employment, or postof duty, regardless of where you maintainyour family home. Your tax home is the placewhere you are permanently or indefinitelyengaged to work as an employee or self-employed individual. Having a tax home ina given location does not necessarily meanthat the given location is your residence ordomicile for tax purposes.

If you do not have a regular or main placeof business because of the nature of yourwork, your tax home may be the place whereyou regularly live. If you have neither a regu-lar or main place of business nor a placewhere you regularly live, you are considered

an itinerant and your tax home is whereveryou work.

You are not considered to have a taxhome in a foreign country for any period inwhich your abode is in the United States.However, your abode is not necessarily in theUnited States while you are temporarily in theUnited States. Your abode is also not neces-sarily in the United States merely becauseyou maintain a dwelling in the United States,whether or not your spouse or dependentsuse the dwelling.

Abode has been variously defined asone's home, habitation, residence, domicile,or place of dwelling. It does not mean yourprincipal place of business. Abode has adomestic rather than a vocational meaningand does not mean the same as tax home.The location of your abode often will dependon where you maintain your economic, family,and personal ties.

Example 1. You are employed on anoffshore oil rig in the territorial waters of aforeign country and work a 28day on/28-dayoff schedule. You return to your family resi-dence in the U.S. during your off periods. Youare considered to have an abode in the U.S.and do not satisfy the tax home test in theforeign country. You cannot claim either of the

exclusions or the housing deduction.

Example 2. For several years, you werea marketing executive with a producer ofmachine tools in Toledo, Ohio. In Novemberof last year your employer transferred you toLondon, England, for a minimum of 18months to set up a sales operation forEurope. Before you left for London, you dis-tributed new business cards showing yournew business and home addresses inLondon. You kept ownership of your home inToledo and rented it to another family. Youplaced your car in storage. In November oflast year, you moved your spouse, children,furniture, and family pets to a home youremployer rented for you in London.

Shortly after moving to London, youbought a car, and you and your spouse gotBritish driving licenses. Your entire family gotlibrary cards for the local public library. Youand your spouse opened bank accounts witha London bank and secured consumer credit.You joined a local business league, and bothyou and your spouse also became active inthe neighborhood civic association andworked with a local charity. Your abode is inLondon for the time you live there, and yousatisfy the tax home test in the foreign coun-try.

Temporary or IndefiniteAssignmentThe location of your tax home often dependson whether your assignment is temporary orindefinite. If you are temporarily absent fromyour tax home in the United States on busi-ness, you may be able to deduct your away-from-home expenses (for travel, meals, andlodging) but you would not qualify for the for-eign earned income exclusion. If your newwork assignment is for an indefinite period,your new place of employment becomes yourtax home, and you would not be able to de-duct any of the related expenses that youhave in the general area of this new workassignment. However, if your new tax homeis in a foreign country and you meet the otherrequirements, your earnings may qualify forthe foreign earned income exclusion.

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Figure 4-A. Can I Claim the Exclusion or Deduction?

Do you have foreignearned income?

Is your tax home in aforeign country? Are you a U.S. citizen?

Are you a U.S. residentalien?

Were you a bona fideresident of a foreigncountry or countries foran uninterrupted periodthat includes an entiretax year?

Are you a citizen ornational of a country withwhich the Unted Stateshas an income tax treatyin effect?

You CAN claim theforeign earned incomeexclusion and theforeign housingexclusion or the foreignhousing deduction.

Were you physicallypresent in a foreigncountry or countries forat least 330 full daysduring any period of 12consecutive months?

You CANNOT claim the foreign earned income exclusion, theforeign housing exclusion, or the foreign housing deduction.

If you expect your employment away fromhome in a single location to last, and it doeslast, for 1 year or less, it is temporary unlessfacts and circumstances indicate otherwise.If you expect it to last for more than 1 yearor you do not expect it to last for 1 year orless, it is indefinite. If you expect it to last for1 year or less, but at some later date youexpect it to last longer than 1 year, it is tem-porary (in the absence of facts and circum-stances indicating otherwise) until your ex-pectation changes.

Foreign CountryTo meet the bona fide residence test or thephysical presence test, you must live in or bepresent in a foreign country. A foreign countryusually is any territory (including the air spaceand territorial waters) under the sovereigntyof a government other than that of the UnitedStates.

The term foreign country includes theseabed and subsoil of those submarine areasadjacent to the territorial waters of a foreigncountry and over which the foreign countryhas exclusive rights under international lawto explore and exploit the natural resources.

The term foreign country does not in-clude Puerto Rico, Guam, the Commonwealthof the Northern Mariana Islands, the Virgin

Islands, or U.S. possessions such as Ameri-can Samoa. For purposes of the foreignearned income exclusion, the foreign housingexclusion, and the foreign housing deduction,the terms foreign, abroad, and overseasrefer to areas outside the United States,American Samoa, Guam, the Commonwealthof the Northern Mariana Islands, Puerto Rico,the Virgin Islands, and the Antarctic region.

American Samoa,Guam, and theCommonwealth of theNorthern Mariana IslandsResidence or presence in a U.S. possessiondoes not qualify you for the foreign earnedincome exclusion. You may, however, qualifyfor the possession exclusion.

American Samoa. There is a possessionexclusion available to individuals who arebona fide residents of American Samoa forthe entire tax year. Gross income fromsources within American Samoa, Guam, orthe Commonwealth of the Northern MarianaIslands may be eligible for this exclusion. In-come that is effectively connected with theconduct of a trade or business within thosepossessions also may be eligible for this ex-clusion. Use Form 4563, Exclusion of Income

for Bona Fide Residents of American Samoa,to figure the exclusion.

Guam and the Commonwealth of theNorthern Mariana Islands. New exclusionrules will apply to residents of Guam and theCommonwealth of the Northern Mariana Is-lands if, and when, new implementationagreements take effect between the UnitedStates and those possessions.

For more information, see Publication 570,Tax Guide for Individuals With Income From U.S. Possessions.

Puerto Ricoand Virgin IslandsResidents of Puerto Rico and the Virgin Is-lands are not entitled to the possession ex-clusion (discussed above) or to the exclusionof foreign earned income or the exclusion ordeduction of foreign housing amounts underthe bona fide residence or physical presencerules discussed later.

Puerto Rico. Generally, if you are a U.S.citizen who is a bona fide resident of PuertoRico for the entire tax year, you are not sub-

ject to U.S. tax on income from Puerto Ricansources. This does not include amounts paidfor services performed as an employee of theUnited States. However, you are subject to

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U.S. tax on your income from sources outsidePuerto Rico. You cannot deduct expensesallocable to the exempt income.

Bona Fide Residence TestThe bona fide residence test applies to U.S.citizens and to any U.S. resident alien who isa citizen or national of a country with whichthe United States has an income tax treaty ineffect.

Bona fide residence. To see if you meet thetest of bona fide residence in a foreign coun-try, you must find out if you have establishedsuch a residence.

Your bona fide residence is not neces-sarily the same as your domicile. Yourdomicile is your permanent home, the placeto which you always return or intend to return.

Example. You could have your domicilein Cleveland, Ohio, and a bona fide residencein London if you intend to return eventually toCleveland.

The fact that you go to London does notautomatically make London your bona fideresidence. If you go there as a tourist, or ona short business trip, and return to the United

States, you have not established bona fideresidence in London. But if you go to Londonto work for an indefinite or extended periodand you set up permanent quarters there foryourself and your family, you probably haveestablished a bona fide residence in a foreigncountry, even though you intend to returneventually to the United States.

You are clearly a transient in the first in-stance. However, in the second, you are aresident because your stay in London ap-pears to be permanent. If your residency isnot as clearly defined as either of these illus-trations, it may be more difficult to decidewhether you have established a bona fideresidence.

Determination. Questions of bona fideresidence are determined according to eachindividual case, taking into account such fac-tors as your intention or the purpose of yourtrip and the nature and length of your stayabroad.

You must show the Internal RevenueService (IRS) that you have been a bona fideresident of a foreign country or countries foran uninterrupted period that includes an entiretax year. The IRS decides whether you qualifyas a bona fide resident of a foreign countrylargely on the basis of facts you report onForm 2555, Foreign Earned Income. File thisform with your income tax return on which youclaim the exclusion of foreign earned income.IRS cannot make this determination until youfile Form 2555.

Statement to foreign authorities. You arenot considered a bona fide resident of a for-eign country if you make a statement to theauthorities of that country that you are not aresident of that country, and the authoritieshold that you are not subject to their incometax laws as a resident.

If you have made such a statement andthe authorities have not made a final decisionon your status, you are not considered to bea bona fide resident of that foreign country.

Special agreements and treaties. The in-come tax exemption provided in a treaty orother international agreement will not in itself

prevent a person from being a bona fide resident of the foreign country. Whether atreaty prevents a person from becoming abona fide resident of a foreign country is de-termined under all provisions of the treaty,including specific provisions relating to resi-dence or privileges and immunities.

Example 1. You are a U.S. citizen em-ployed in England by a U.S. employer undercontract with the U.S. Armed Forces. You donot qualify for special status under the NorthAtlantic Treaty Status of Forces Agreement.You are subject to United Kingdom incometaxes and may qualify as a bona fide resident.

Example 2. You are a U.S. citizen inEngland who qualifies as an employee ofan armed service or as a member of a civil-ian component under the North AtlanticTreaty Status of Forces Agreement. You donot qualify as a bona fide resident.

Example 3. You are a U.S. citizen em-ployed in Japan by a U.S. employer undercontract with the U.S. Armed Forces. You aresubject to the agreement of the Treaty ofMutual Cooperation and Security between theUnited States and Japan. You do not qualifyas a bona fide resident.

Example 4. You are a U.S. citizen em-ployed as an official by the United Nationsin Switzerland. You are exempt from Swisstaxation on the salary or wages paid to youby the United Nations. This does not preventyou from qualifying as a bona fide resident ifyou meet all the requirements for that status.

Effect of voting by absentee ballot. If youare a U.S. citizen living abroad, you can voteby absentee ballot in any elections held in theUnited States without risking your status asa bona fide resident of a foreign country.

However, if you give information to thelocal election officials about the nature andlength of your stay abroad that does not

match the information you give for the bonafide residence test, the information given inconnection with absentee voting will be con-sidered in determining your status, but will notnecessarily be conclusive.

Uninterrupted period including entire taxyear. To qualify for bona fide residence, youmust reside in a foreign country for an unin-terrupted period that includes an entire taxyear. An entire tax year is from January 1through December 31 for taxpayers who filetheir income tax returns on a calendar yearbasis.

During the period of bona fide residencein a foreign countryeven during the first fullyearyou can leave the country for brief or

temporary trips back to the United States orelsewhere for vacation or business. To keepyour status as a bona fide resident of a for-eign country, you must have a clear intentionof returning from such trips, without unrea-sonable delay, to your foreign residence or toa new bona fide residence in another foreigncountry.

Example 1. You are the Lisbon repre-sentative of a U.S. employer. You arrive withyour family in Lisbon on November 1, 1995.Your assignment is indefinite, and you intendto live there with your family until your com-pany sends you to a new post. You imme-diately establish residence there. On April 1,1996, you arrive in the United States to meet

with your employer, leaving your family inLisbon. You return to Lisbon on May 1, andcontinue living there. On January 1, 1997, youhave completed an uninterrupted period ofresidence for a full tax year (1996), and youmay qualify as a bona fide resident of a for-eign country.

Example 2. Assume that in Example 1,you are transferred back to the United Stateson December 13, 1996. You do not qualifyunder the bona fide residence test becauseyour bona fide residence in the foreign coun-try, although it lasted more than a year, didnot include a full tax year. You may, however,qualify for the foreign earned income exclu-sion or the housing exclusion or deductionunder the physical presence test discussedlater.

Bona fide residence status not automatic. You do not automatically acquirebona fide resident status merely by living ina foreign country or countries for 1 year.

Example. If you go to a foreign countryto work on a particular construction job for aspecified period of time, you ordinarily will notbe regarded as a bona fide

Documents

US Internal Revenue Service: p54--1997