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Question for the Money Doctors

Question submitted on Feb 22, 2013.

Question

Hello,
I have a question regarding whether or not I would need to pay US taxes while I am working abroad.
I read the article on this site and I would like clarification on one of the rules. It states:

You must reside in a foreign country for an entire tax year or for at least 330 days during a 12-month period

When does this 12 month period begin? Is it a rolling 12 months depending on when you leave the US? Is it a calendar year? I am currrrently waiting for my visa and I am afraid that I will be in the states for longer than 35 days in this calendar year, but I will be abroad working for the next two years.

Please, any information would be helpful.

Thank you,

Karly

Answer

Assuming you are a US citizen, the first caveat is you are taxed on your worldwide income. However, there are some exclusions available on your US return while working outside of the US. Your US tax liability will be a function of your income, your use of the exclusions, and any foreign tax credits you may be entitled to use depending on what country you will be working in and earning your income.

IRS Publication 554 states the following:

"You meet the physical presence test if you are physically present in a foreign country or countries 330 full days during a period of 12 consecutive months. The 330 days do not have to be consecutive. Any U.S. citizen or resident alien can use the physical presence test to qualify for the exclusion and the deduction."

"The physical presence test is based only on how long you stay in a foreign country or countries. This test does not depend on the kind of residence you establish, your intentions about returning, or the nature and purpose of your stay abroad."

Most people do not have the convenient scheduling for the rule to work out over a calendar year so a few things about the 12 month rule:

1) The 12 month period should be composed of consecutive months that include 330 days in foreign countries or country.

2) The 12 month period can begin from any day of any month and must end before the same calendar day 12 months later.

3) 12 month periods may overlap with each other.

Since you will be working abroad the next 2 years upon receipt of your work visa, you should be able to effectively use the 12 month rule on multiple years' US tax returns. This does not necessarily eliminate the requirement to pay US taxes depending on your situation. I would consult a CPA/PFS (visit www.findacpapfs.org) with experience in tax returns for Americans working outside the US.


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