Foreign Earned Income reported to IRS? from Dubai?

Question

I am considering a move to Dubai very shortly and I was under the impression that if one lives outside the US (or its territories, ie Guam) for 335 days or more per year, they will avoid US income taxes. I have read many differing opinions and the IRS website is difficult to comprehend with 100% certainty. Does anyone know what the actual rules are?

Answer 1

Get a copy of IRS Pub 54 from the IRS website. It can be difficult to digest but you're going to need it.

Basically if you live in a foreign country you can exclude up to $87,400 of earned income from US income taxes. Alternatively you can claim a credit against your US tax liability for all foreign income taxes paid. You can figure your taxes both ways and use whichever way is most beneficial to you.

As I said, the rules and procedures are complex and it's easy to get things wrong. For this reason it is often a good idea to consult with a tax professional such as a CPA or EA who specializes in foreign income and taxation.

For example, to claim the Foreign Earned Income Exclusion you must either meet the Foreign Residence Test or the Physical Presence Test. The Foreign Residence Test is pretty straightforward; you must maintain a residence in a foreign country for the entire tax year. The Physical Presence Test gets a bit trickier since any time spent over international waters does NOT count towards the 335 days that you must be physically present in a foreign country during the full 12 month period. I know people who have lost the exclusion because they spent 30 days in the US and 2 days in transit resulting in 333 days in a foreign country and thereby failed the Physical Presence Test. This is just one of the ways that you can screw yourself with the IRS so a complete understanding of the rules is critical to your financial health.

Answer 2

I'm not going to look at 4655, but let's review the concept. What was your taxable income BEFORE the foreign earned income exclusion (including worldwide income)? What was your taxable income AFTER the foreign earned income exclusion? Was it zero? If zero, your tax is zero. If it's more than zero, the tax depends on the tax bracket the money would have been taxed in if the foreign income wasn't excluded. (The lowest tax bracket, 10%, is applied to the excluded income. Your higher tax bracket is applied to the included income.) If line 2 and line 3 of the worksheet have different numbers, you MUST also have different numbers on lines 4 and 5.

Answer 3

I think you pay Tax for the first year only. Call IRS or call H&R block to be 100% certian.