Expert: Consuelo Herrera, International Accountant and Fraud Examiner - 8/13/2009

Question
Dear Expert

    I am American citizen working overseas in a foreign country at this time. I started working overseas on April, 10, 2009, and my contract will end on April,11,2010. I am 33 single with no dependents, and no properties.

    there is a tax exemption for anyone who works outside United states of America, is called credit for foreign earned income for up to $ 87600 a year for 2008, and for 2009 will be increased by certain amount of inflation. My employer said the refund will depend on the number of days that I spend working in the foreign country.

    The company that I work for said that they will not charge me taxes for minimum of $80,000, but I am paying almost $2000 for taxes every month. Does this mean that they will send me a check for those 80 thousand after I file for my tax return?

    What is the minimum number of days or months that I have to spend working in a foreign country in order to receive tax exemption?

    When my days in a foreign country decrease, the amount of refund also decreases? And when days increase the refund also will increase?

    If I go for one to 4 weeks tourism vacation to other foreign countries while I am working here, and I pay for transportation, hotel, and meals will these expenses help me to increase my tax refund amount or not?   
 
    If I will be working in a foreign country from April 2009 to April 2010, When is the best time to take my 4 weeks vacation outside this country?

Thank you for your answers.

Sincerely;
Sam


Answer
Dear Sam,

Thank you for contacting me.

Since I am prevented for providing tax advise, I suggest that you cut and paste the link below, which will provide valuable information directly from the Internal Revenue Service:

http://www.irs.gov/faqs/faq/0,,id=199678,00.html

I am also including a question answered by the IRS to a taxpayer in a situation similar to yours.



Citizens Overseas

Question:   I am a U.S. citizen living and working overseas. Can I have a tax credit on my U.S. taxes for the taxes I pay to the foreign country?



Answer:    

You can choose each tax year to take the amount of a qualified tax paid or accrued during the year as a foreign tax credit or as an itemized deduction.

The foreign tax credit is intended to relieve U.S. taxpayers of the double tax burden when their foreign source income is taxed by both the United States and the foreign country from which the income is derived.

Only income taxes paid or accrued to a foreign country or a U.S. possession qualify for the foreign tax credit.

You can choose to take the amount of any qualified foreign taxes paid or accrued during the year as a foreign tax credit or as an itemized deduction.

To choose the foreign tax credit you must generally complete Form 1116 (PDF), Foreign Tax Credit, and attach it to your Form 1040 (PDF).

You may claim credit without attaching Form 1116 if all of your foreign source income is interest or dividends reported to you on qualified payee statements, the total amount of qualifying foreign taxes you paid or accrued is not more than $300 ($600 in the case of a joint return) and is also paid to countries recognized by the United States.

To choose the deduction, you must itemize deductions on Form 1040, Schedule A (PDF).
There are numerous items that can be claimed only as a deduction.

You may not take either a credit or a deduction for taxes paid or accrued on income you exclude under the foreign earned income exclusion or the foreign housing exclusion. There is no double taxation in this situation because the income is not subject to U.S. tax.


Additional Information:


Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad
Publication 514, Foreign Tax Credit for Individuals
Form 1116 (PDF), Foreign Tax Credit
Tax Topic 856, Foreign Tax Credit


Category:  Aliens and U.S. Citizens Living Abroad


Subcategory:  U.S. Citizens Overseas.


Keep in mind that travel and living expenses are tax deductible only when they are business related. If you combine business and personal travel you must allocate the expenses to determine the share of the deductible amount.


Finally, if you want to have a clear understanding of your potential tax liability, I suggest that you play different scenarios using the IRS withholding calculator.


Withholding Calculator:

http://www.irs.gov/individuals/page/0,,id=14806,00.html


Best wishes for your success.


Sincerely,


Consuelo Herrera, CAMS, CFE
www.fraudsolutionsinternational.com