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Question for the Money Doctors

Question submitted on Jan 10, 2013.

Question

If someone from the U.S. lives and works in Malaysia for say, a year, do they have to pay taxes on the money they earned while in Malaysia BEFORE being able to leave the country and return to the U.S.?

Answer

If you are a US citizen or resident, you are still required to file US tax returns no matter where you are in the world or where the earnings was generated. However, there is the Foreign Earned Income Exclusion that is reported on Form 2555. Please take a look at the instructions to this form to see if you qualify for this exclusion. There are two tests to qualify for this exclusion - the Physical Presence Test and the Bonafide Residence Test. There is enough space here to go into detail. The link to the instructions is http://www.irs.gov/pub/irs-pdf/i2555.pdf. If you were overseas for the full year, the maximum exclusion for 2012 was $95,100. Therefore, if you earned less than $95,100, there will be no US tax. Although the tax is zero, you still need to file a tax return. IRS Publication 54, ATax for US Citizens and Resident Aliens Living Abroad is a helpful guide. http://www.irs.gov/pub/irs-pdf/p54.pdf Also, when you are working overseas, you may be paying taxes in that country. If so, you are entitled to the Foreign Tax Credit which is reported on Form 1116. The instructions are at www.irs.gov/pub/irs-pdf/i1116.pdf. Also, there are more complications when you are overseas. If you have an overseas bank account and have more than $10,000 in that account during the year, that needs to be reported on Form TDF 90-22.1. Although you may not receive a 1099 from the overseas bank account, any interest and dividends earned still needs to be reported on your tax return. This can get very complicated, please consult a competent and knowledgable tax advisor on this topic. You can visit www.findacpapfs.org to find a CPA/PFS near you.


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