Veronica Tubman: I see it's the top of the hour. And for those of you joining, welcome to today's webinar Americans Abroad: Tax Obligations and Reporting Requirements. We're so glad that you've joined us today. My name is Veronica Tubman, and I am a Senior Stakeholder Liaison with the Internal Revenue Service. And I have the pleasure of being your moderator for today's webinar, which is slated for approximately 120 minutes. But before we begin, if there is anyone in the audience that is with the media, while please send us an e-mail to the address on the slide. Be sure to include your contact information and the new publication you're with. Our Media Relations and Stakeholder Liaison staff will be more than happy to assist you and answer any questions that you might have. As a reminder, this webinar will be recorded and posted to the IRS Video Portal in a few weeks. This portal is located at www.irsvideos.gov. Please note, continuing education credit or certificates of completion are not offered if you viewed any version of our webinars after the live broadcast, so just keep that in mind. Again, we hope you won't experience any technology issues, but if you do, this slide shows helpful tips and reminders kind of help you out. We've posted a technical help document that you can download from the material section on the left side of the screen. It provides the minimum system requirement for viewing this webinar, along with some best practices and some quick solutions. If you completed and if you pass the system check and still having problems, while try one of the following: First, close the screen where you're viewing the webinar and just re-launch it; second click on Settings on your browser viewing section and select HLS. You could have received today's PowerPoint in a reminder e-mail, but if you didn't, no worries, we've got you covered. You can download it by clicking on the materials drop down arrow, and that's right on the left on the left of your screen, as shown on this slide.

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Please do not enter any sensitive or taxpayer specific information. We want to make sure that we keep everybody's privacy number one with us. During this presentation, we'll take a few breaks to share knowledge-based questions with you. After those questions, a polling style feature will pop up on your screen with a question and multiple choice answers. Select the response that you feel and that you believe is correct by clicking on the radio button that's right next to your selection, and then simply click Submit. Some people may not get the polling questions. This may be because you have your pop-up blocker on. So please take a few minutes to disable your pop-up blocker now so that you can answer the question. We've included several technical documents that describe how you can allow pop-up blockers based on the browser that you would happen to be using.

We have documents for Chrome, Firefox, Microsoft Edge and Safari for Mac. You can access them by clicking on the materials drop down arrow that's on the left side of your screen. Okay, so we're going to take some time and test the polling feature. Here's your opportunity to ensure your pop-up blocker is not on, so you can receive the polling questions throughout today's presentation. Have you ever downloaded an IRS national webinar recording from the video portal?

The options are: A, yes; B, no; and C, where is the video portal? So take a moment and click the radio button that corresponds to your answer. So let me reread that for you. Have you ever downloaded an IRS national webinar recording from the video portal? A, yes; B, no; or C, where is the video portal? Again, take a few moments and click the radio button that corresponds to your answer. And I'm just going to give you a few seconds to make your selection. Okay, we're going to stop the polling now. Let's see how the majority of you have responded. Okay, so let's take a look. So, we hope that you received the polling question and it was able to submit it. So, let's see how many of you selected, so for A, which was, yes, 27% of you. Let's see, for B, 68% of you said no. And then 5% of you said, where's the video portal? So we hope you received a polling question and it was able to submit your answer. Like we said, if not, now is the time to check it.

Check your pop-up blocker to make sure that it's turned off. And again, we've included several technical documents. So we got you to describe how you can allow pop-up blockers based on the browser you are using. So just click the material drop down arrow on the left side of your screen and simply download your browser document. So, again, I would like to extend a warm welcome to you and thank you for joining today's webinar. Before we move along with our session, let me make sure that you are in the right place. Today's webinar is Americans Abroad: Tax Obligations and Reporting Requirements. This webinar is scheduled for approximately 120 minutes. Audience, please note that the information contained in this presentation and throughout is current as of the date it is presented, so it should not be considered official guidance. Now, let me introduce today's speakers, Bethany Krause, Tracy McFee and Maria Nickolaou are Senior Revenue Agents with Withholding, Exchange and International Individual Compliance and that's in the Large Business and International Division. These ladies, as technical specialists, they each facilitate and coordinate the identification, development and resolution of international issues. Bethany and Tracy have expertise with tax issues for U.S. citizens and residents living abroad and that's a good thing. Maria has expertise with foreign tax credits for individuals. And with that being said, I'm going to turn it over to Bethany to begin the presentation. Bethany, you're up. Bethany Krause: Thank you, Veronica, and hello, everybody. During our webinar today, we're going to specify the U.S. income tax obligations of U.S. citizens and residents who are living and working outside the United States. We're also going to discuss the individual income tax reporting requirements; explain the requirements for reporting foreign assets or investments on a Report of Foreign Bank and Financial Accounts commonly referred to as an FBAR; and list the requirements for claiming the foreign earned income exclusion; discuss relief through the Foreign Tax Credit; and summarize the U.S. employment tax obligations of U.S. citizens and residents living and working outside the United States. As you can tell, we have a lot of ground to cover today, so we're trying to do this as awareness and help you some. There are other webinars and practice units and web pages at IRS.gov that could be helpful if you have to delve deeper into any one of these topics. And I think particularly of the foreign earned income exclusion, because we're not going into a whole lot of depth on that today. But we have done webinars in the past that included that one of which is entitled Foreign Earned Income Exclusion, and it is available still in the portal, the past webinar. On this slide, we see some acronyms that will be used during our webinar today.

You might want to look those over. If U.S. citizens include those who are dual citizens or dual nationals, also included are people who may consider themselves accidental Americans, meaning they were born in the United States, but they haven't been back to the United States since they were a small child. U.S. citizens living and working abroad must report and pay applicable taxes on all their income, regardless of source, unless a particular item of income is specifically exempt under the Internal Revenue Code or under a provision of an income tax treaty. They may be subject to employment taxes and they must file a Form 1040 with the IRS. U.S. residents living and working abroad are generally taxed in the same manner as U.S. citizens, meaning they too must report and pay applicable federal taxes on all their income, regardless of source, unless specifically exempt under the Internal Revenue Code or a tax treaty provision. They too may be subject to employment taxes, and they generally must file a Form 1040. Veronica, is this a good time for our first polling question? Veronica Tubman: Why, yes, it is. Thank you so much. Okay, audience, it's time for our first polling question. U.S. citizens and resident aliens must report and pay applicable U.S. taxes on: A, all of their income, now that's both U.S. and foreign source, if living in the U.S.; B, only their U.S. source income; or C, all of their income, both U.S. and foreign source, regardless of where they live; or lastly, D, only their foreign source income. Take a moment and click the radio button that best describes the question. And I'll give you a few more seconds to make your selection. Okay, we're going to stop the polling now and let's share the correct answer on the next slide. Taking a look at this, our first polling question, and the correct response is what do you know? It's C, all of their income, both U.S. and foreign source, regardless of where they live. So let's take a look. I see that 84% of you responded correctly. That's really a great correct response rate. And for our first polling question, you all rock. And with that being said, okay, over to you, Tracy. Tracy McFee: Thank you, Veronica. So we're going to talk about the filing status of U.S. citizens or residents who are married to nonresidents. And they have a choice. They may, if they choose, along with their spouse, file a joint Form 1040 choosing to treat the nonresident spouse as a U.S. resident for tax purposes. However, if they don't make this choice to file a joint return with their nonresident spouse, the U.S. citizen or resident would be considered unmarried for purposes of filing Form 1040 for determining head of household status. However, I want to point out that the nonresident spouse is not a qualifying person for the purposes of the head of household filing status. So, if a U.S. citizen or resident is married to a nonresident and they're not electing to file a joint return, in order to file as head of household, they must have another qualifying person and meet the other tests that are required to be eligible to file as head of household. If a U.S. citizen or resident who's married to a nonresident chooses not to file a joint return and does not qualify as head of household, then their only option is to file the Form 1040 using the filing status of married filing separate.

This next slide briefly explains the joint return elections that are available to you, a U.S.

individual who's married to a nonresident. The 6013(g) election in 6013(g) refers to the Internal Revenue Code section that allows an individual who was not a U.S. resident during the tax year, but who was married to a U.S. citizen or resident to along with their spouse choose to be treated as a U.S. resident. Now, this is a choice that needs to be carefully considered since it's a once in a lifetime election and will apply to all future years unless it's suspended or terminated. On the right hand side of this slide, there is a mention of IRC Section 6013(h) in the election that's allowed under that. There's a slight difference between a 6013(g) election and that of a 6013(h) election, which under 6013(h) in order to make that election, the nonresident spouse has to become a U.S. resident by the end of the tax year, and then they would be able to make a 6013(h) election to have the nonresident spouse, who became a U.S. resident to be treated as a U.S. resident for the entire year. If either election is made, it's made by attaching a statement to the jointly filed Form 1040 for the first year that the election is made. And I want to note that making either of these elections generally will prohibit individuals from claiming the benefits under a U.S. income tax treaty, as if they're as a resident of that treaty country, because that would be considered an inconsistent position. We're going to next discuss filing requirements and due dates. So this presentation is timely because as U.S. citizens and residents, you must file a Form 1040 even if you live and work abroad. However, you're allowed an additional 2 extra months to file your return and pay any amount due without requesting extension. And that automatic 2-month extension would be to June 15, which is just a couple of days from now. There is no form to file to request this automatic 2-month extension to June 15. However, you should attach a statement to your tax return explaining that you qualified for this 2-month extension, because you lived and worked abroad. Again, if you live and work abroad and file a calendar year income tax return, you will have until June to pay the tax and file your return, or if you're unable to file by June 15, you would need to submit Form 4868 to request an additional 4-month extension. If you expect to meet either the bona fide residence test or the physical presence test for purposes of foreign earned income exclusion that Bethany is going to talk in more detail about later. But you don't know if you're going to meet those tests by the due date of your return, you can request additional time, and this is only for purposes of an extension for the foreign earned income exclusion by filing Form 2350 which allows you to request an extension to a date after you have met either the bona fide residence test or the physical presence test. And Form 2350 must be filed on or before the due date of your return. You need to be aware that you can owe interest on any tax that's not paid by the due date. And for calendar year taxpayers, that's going to typically be April 15 and interest will run until the tax is paid. Late payment penalties can also be applied to any tax not paid by the 2-month extended due date, so not paid by June 15. This is true regardless of any extensions that may be granted. In addition to filing an income tax return, you may have information reporting requirements and one of those is FinCEN Form 114, which is the Report of Foreign Bank and Financial Accounts or FBARs, that is due April 15. But if more time is needed, there is an automatic extension to file the FinCEN 114 to October 15. The Bank Secrecy Act requires yearly filing of an FBAR, if you're a U.S. citizen or resident with a financial interest in, or signature, or other authority over one or more foreign financial accounts, and the aggregate value of the accounts exceeds $10,000 at any time during the calendar year. If the account is jointly held, each person must report the entire value of the account on the FinCEN Form 114. Now, when I use the term foreign financial account, I'm talking about such things as bank accounts, security accounts, including brokerage accounts, commodities, futures and option accounts, insurance or annuity policies with a cash value, mutual funds or similar pooled funds, or any other accounts maintained in a foreign financial institution or with a person engaged in the business of banking. It does not include stocks, bonds, or similar financial instruments that are held directly by you, real estate earned account, holding solely real estate, precious metals or gems held directly by you, or the contents of a safety deposit box. The FBAR or Foreign Bank Account Report must be filed electronically, and a link to FinCEN's e-filing system is provided on the resources slide at the end of this presentation. In addition to the FinCEN Form 114, some other common information reporting requirements is Form 8938, which is a statement of Specified Foreign Financial Assets. You must file this form if you have an interest in a specified foreign financial asset. And the value of those assets is more than the applicable reporting threshold, which is either $200,000 on the last day of the tax year, or $400,000 if you're married filing joint on the last day of the tax year, $300,000 for any other filing status other than married filing joint at any day during the tax year, or $600,000 at any time during the tax year if your filing status is married filing joint. Now, you have an interest in a specified foreign financial asset, if any income gains, losses, deductions, credits, gross proceeds, or distributions from holding or disposing of the asset are, or would be required to be included, or reported, or otherwise reflected on your U.S. income tax return. In addition to the FinCEN 114 and the Form 8938, there's some other possible information reporting requirements include: Form 3520, which is an annual return to report transactions with foreign trust and the receipt of certain foreign gifts; Form 5471, which is an information return of a U.S. person with respect to certain foreign corporations; and Form 8865, which is the return of U.S. persons with respect to certain foreign partnerships. So, now that we've talked about filing requirements, I'm going to turn the mic over to Bethany, who's going to introduce some provisions that may help provide some relief from double taxation. Bethany? Bethany Krause: Thank you, Tracy. Double taxation is something that may happen when an individual is taxable on an item of income by both the United States and another country.

And there are three different mechanisms that may provide relief from double taxation, and these include the foreign earned income exclusion, foreign tax credits, or provisions in an income tax treaty, if there is an applicable treaty. Now, our focus is on just two of these today, the foreign earned income exclusion and the foreign tax credit. Okay, as a U.S. citizen or resident, you're taxed on your worldwide income. However, if you live and work in a foreign country, you may qualify to exclude income that you earned for services that you performed there in that foreign country or in a foreign country. The foreign earned income exclusion is only available to U.S.

citizens and residents who meet the requirements. It's not available to nonresidents. The exclusion is claimed on IR S Form 2555 and the maximum amount that can be excluded is indexed annually for inflation. So for 2022, the maximum foreign earned income exclusion was $112,000 and for 2023 it is $120,000. Now, in addition to the foreign earned income exclusion, you may also be able to exclude, if you're an employee or deduct self-employed foreign housing expenses in excess of a base amount and subject to a limit. To claim the foreign earned income exclusion, the foreign housing exclusion or the foreign housing deduction, you must meet certain requirements.

You must have foreign earned income, your tax home has to be in a foreign country, you must meet either the bona fide residence or physical presence test, and you must make a valid election.

Foreign earned income is income that you receive for services you perform in a foreign country.

Income earned in the U.S. territory is not foreign earned income. Antarctica is not a foreign country, neither is international waters or airspace, so anything earned in those locations is not foreign earned income. Foreign earned income does not include wages paid by the U.S. or any of its agencies, to U.S. government employees, or to members of the United States armed forces. That is not considered foreign earned income, even if the services were performed in a foreign country.

Okay, Veronica, this looks like it might be a good time for our second polling question for those who are taking this course for continuing education purposes. Veronica Tubman: Well, Bethany, I totally agree with you. Okay, audience, our second polling question is: Which of the following is not foreign earned income? Is the correct response: A, Wages paid by the U.S. government to a U.S.

government employee working in a foreign country; or is it B, Income earned in international airspace? Or is it C, Income earned in a U.S. territory; or lastly, D, All of the above. So please take a minute and review the question and the responses and click the radio button you believe most closely answers this question. So I'm going to give you a few more seconds to make your selection. So please take a minute and review the question again, then click on the radio button you believe most closely answers this question. Okay, audience, I'm going to stop the polling now, and we'll share the correct answer on the next slide. And the correct answer is D, all of the above. So let me take a look and see how everybody did. I see 88% of you responded correctly. That's a great correct response rate. Thanks so much, audience. And Bethany, looks like you're going to discuss foreign tax homes. Does that correct? Bethany Krause: That's right, Veronica. To claim the foreign earned income exclusion, you have to have a foreign tax home. An individual's tax home is the general area of their main place of business, employment, or post of duty, meaning the place where they're permanently or indefinitely engaged to work as an employee or as a self-employed individual. Having a tax home in a given location A doesn't necessarily mean that the given location is a person's residence or domicile for tax purposes. Now, if a person does not have a regular or main place of business, because of the nature of their work, then their tax home would be where they regularly live. If they have neither a regular or main place of business nor a place where they regularly live, then they are considered an itinerant, and their tax home would be wherever they're working. And usually what comes to my mind when I think of this is someone who's a roving news correspondent and they travel the world and they're never in any hotel or place for more than a couple of days. So a scenario like that, the tax home is kind of moving along with them it's wherever they work. Now, you're not considered to have a tax home in a foreign country for any period in which you're abodes in the U.S., unless for tax years beginning after December 31 of 2017, you're serving in support of the armed forces of the armed forces of the United States. In an area that's designated by executive order as a combat zone. The word abode is very subjective, and it's been defined by the courts as where an individual's economic, family, and personal ties are the strongest. Okay, we've talked about the first two requirements for claiming the foreign earned income exclusion, the fact that a person has to have foreign earned income and their tax home has to be in a foreign country. Now, there are two other requirements.

An individual also must meet either the bona fide residence or physical presence test and have made a valid election to exclude foreign earned income. Okay, let's talk now about the bona fide residence test. A person meets the bona fide residence test, if they're a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year; and for calendar year taxpayers, which is what most of us are that would be an entire calendar year. One doesn't automatically acquire bona fide resident status by just living in a foreign country or countries for one-year. For example, if you go to a foreign country to work on a particular job for a specified period of time, then you ordinarily wouldn't be regarded as a bona fide resident of that country, even though the work there could take a tax year or longer. So the length of the stay abroad and the nature of one's job are only two of the factors to consider in determining whether the bona fide residence test is met. The bona fide residence test is a subjective test.

And in determining bona fide residency, the courts analyze eleven factors, which were first set forth in Sochurek versus Commissioner, which is a 1962 court case. And those factors include the individual's intent, the extent of their assimilation into the life and society of the foreign country, and reasons for any temporary absences. Now, while the Sochurek case had to do with bona fide residency in a U.S. territory, the court still looked to those eleven factors that were considered in that case, when determining whether an individual is a bona fide resident of a foreign country for purposes of the foreign earned income exclusion. Now, let's talk a little bit about the physical presence test. This is an objective test and it is determined by counting the number of full days that a person is physically present in a foreign country or countries. And a full day is defined as midnight to midnight. In order to meet the physical presence test, one has to be physically present in a foreign country for any reason for at least 330 full days during any period of 12 consecutive months that begins or ends during the tax year. A 12 consecutive month period can begin on any day, so it is not necessarily going to be a calendar year, and there could be more than one 12-month period involved and 12-month period can even overlap. And for more information on that, see Publication 54. We also have web pages on these topics as well. The minimum time requirements for the bona fide residency and physical presence test can be waived if an individual must leave a foreign country, because of war, civil unrest, or other adverse conditions. A list of countries which qualify for the waiver is published in the Internal Revenue Bulletin each year, along with applicable departure date. And here on this slide is a list of the countries s and the dates of departure for 2022. The individual must show that they had a tax home in the foreign country and that on or before the beginning date of the waiver, they reasonably could have expected to meet those minimum time requirements, but for the adverse condition. Now, the fourth and final requirement for claiming the foreign earned income exclusion is that you must have made a valid election to do so. The election to exclude foreign earned income and the election to exclude the cost of foreign housing are separate elections, and a person can make one or both of those elections by attaching Form 2555 to the tax return for the first year for which the election is effective. Once a decision is made to exclude foreign earned income that choice remains in effect for that tax year and for all later tax years, unless it is revoked. Please keep in mind that once you choose to exclude foreign earned income, you cannot take a foreign tax credit or deduction for foreign taxes on the income that you can exclude. If you do take a credit or deduction for any of those taxes in a subsequent year, then the election to exclude foreign earned income will be considered revoked beginning with that year and will not be allowed to claim the foreign earned income exclusion for the next 5 years. The initial choice of the exclusions on Form 2555 generally has to be made with a timely filed return, including any extension, a return amending a timely filed return, or a late filed return filed within 1-year from the original due date of the tax return, which is determined without regard to any extension. Veronica, if it's all right with you, maybe we start here for our third polling question. Veronica Tubman: Well, Bethany, that's just fine with me and thanks. Okay, audience, our third polling question is: Which of the following requirements must be met in order to qualify for the foreign earned income exclusion? So please take a minute, click in the radio button you believe most closely answers the question. So do you believe that the correct answer is: A, Foreign earned income; B, Meet the bona fide residence or physical presence test; C, Valid election; D, Foreign tax home; or E, All of the above. Okay, so take a minute and review the question again, then click in the radio button you believe most closely answers this question. So go ahead and make the selection. I'll give you a few more seconds to do that. Okay, family, we are going to stop the polling now. And we'll share the correct answer on the next slide. And the correct answer is with an invisible drum roll, E, All of the above. So let me see how good the audience has been with listening to Bethany. As I said in school with your thinking caps on, I see that 96% of you responded correctly. That is an absolutely great correct response rate. So Bethany, can you tell us about the following requirements? Bethany Krause: I sure can, Veronica. So, you must file a tax return attaching the Form 2555 in order to claim the foreign earned income exclusion and/or the foreign housing exclusion or deduction, following the instructions for the Form 1040. And one key thing here that I want to mention is that when it comes to tax, you need to complete the foreign earned income tax worksheet to figures the tax on any income that is not excluded. Also, please note that even if your foreign earnings are below the foreign earned income exclusion threshold, it is still required that you file a U.S. income tax return. Now, I'm going to turn things over to Maria.

Maria? Maria Nickolaou: Thank you, Bethany. We're going to change gears now and move to another topic. Like Bethany just said, one of the mechanisms available to taxpayers is the Foreign Tax Credit, or FTC, and this slide shows what can be considered the tripod of FTC concepts. It's already been explained about how we tax worldwide taxable income, which is the most defining characteristic of our U.S. policy. So I'm not going to dwell on that. And while you can find relief by claiming the foreign earned income exclusion, the other option is the FTC. And this allows a reduction of tax dollar for dollar, and it is quite valuable as compared to a deduction that only reduces your tax by your marginal tax rate. The FTC allows a reduction of U.S. tax on foreign source income by all or part of the foreign qualified income taxes paid or accrued during the year. The key takeaway here is that the FTC does not reduce the U.S. tax on U.S. income. And notice I just said by all or part of, and that brings us to our next bullet. The FTC can be limited. The full amount of foreign income tax paid or accrued isn't necessarily the amount that you will get FTC for in that year. And the FTC can only be claimed for qualified foreign taxes paid or accrued on foreign source income. Now, taxpayers can make an annual election to either claim the credit or they can choose to deduct the foreign taxes. So they can claim a credit in 1-year and a deduction in another year, or vice versa. But they can't do both on the same foreign taxes in the same tax year. If a taxpayer chooses to claim a deduction for foreign income taxes, they must itemize their deductions to get the benefit. And, again, a tax deduction reduces the amount of income subject to income tax, while a credit reduces the amount of tax. Attaching a completed Form 1116 to a timely filed U.S. original tax return constitutes an election to claim the FTC. Once an election is made to either claim a credit or deduction, all the foreign taxes must be treated the same for that particular year. In other words, if a taxpayer chooses to take a credit for qualified foreign taxes, they must take a credit for all the foreign taxes paid or accrued in that year. They cannot take a credit for some and a deduction for others. Now, there is a de minimis exception for filing Form 1116, and that holds true if all of the following conditions are met: One, all foreign source income is passive things like interest and dividends; two, the foreign taxes withheld at the source; three, all passive income was reported on qualified payee statements, such as 1099-DIV or 1099-INT; and four, the foreign tax withheld is not more than $600 for married filing joint or $300 for all other filing statuses. If you meet all four of those requirements, then you can elect to report the FTC directly on Form 1040 Schedule 3 Line 1.

Now, we'll go over and talk about eligibility. The most common taxpayers eligible for the FTC are U.S. citizens and resident aliens, and both are sometimes referred to collectively as U.S.

persons. This includes any eligible taxpayer, who is a member of a partnership, and a shareholder of an S corp, or a beneficiary of an estate or trust. Normally, nonresident aliens cannot claim FTC, because they are not taxed by the U.S. on their foreign source income. And there are exceptions, but they're not being discussed at this time. Veronica, I think it's time for our fourth polling question. Veronica Tubman: Yes, we are. Thanks, Maria, and that's fine with me.

Okay, audience, it's our fourth polling question. Which statement below is false? Please take a minute and click in the radio button you believe most closely answers the question. So, do you think the correct is: A, The purpose of the credit is to eliminate double taxation of income? Or is it B, Property tax may be creditable under some circumstances? Or is it C, Some foreign countries do not have an income tax? Or is it D, Married filing joint taxpayers can claim the FTC directly on Form 1040 when not more than $600 is subject to other requirements? Okay, take a minute and review the question again, then click in the radio button you believe most closely answers this question.

So go ahead and make your selection, and I'll give you a few more seconds. So don't forget, take a little time and review that question again, and then click in the radio button you believe most closely answers this question. Go ahead and make your selection now. Just a few more seconds to go. So just to make sure we get everybody, let me read that once again. The question is which statement below is false. A, The purpose of the credit is to eliminate double taxation of income; B, Property taxes may be creditable under some circumstances; C, Some foreign countries do not have an income tax; Or is it D, Married filing joint taxpayers can claim FTC directly on Form 1040, when no more than $600 is subject to the other requirements? Okay, everybody, I think that's more than enough time for you to have your selection. Let's just go on to the next slide. And the correct response is, B, Property taxes may be creditable under some circumstances. Okay, let's see, how well did everybody do with this particular question? Oh, I see that 55% of you responded correctly. Well, guess what? I think we need a little bit more clarification for this particular question. So, Maria, can you provide a little bit more detail, please? Maria Nickolaou: Sure. So the question was which statement is false. And the first statement, The purpose of the credit is to eliminate double taxation of income is true. That is one of the main purposes of the FTC. So that's not the answer. The fact that some foreign countries do not have an income tax has no bearing. Obviously, if the foreign countries don't tax, then there's no double taxation, so there'd be no foreign tax credit. And the third one, I mentioned, that was the de minimis exception for married filing joint taxpayers. And if they meet those four requirements I mentioned, and it's not more than $600, that statement is true. What is not true is that property taxes are creditable.

Property taxes are not income taxes. So hopefully that answers - everyone's misguided answers, and hopefully that shed some clarity on it. Veronica Tubman: Thank you so much, Maria, for that explanation. That really helped us a lot. And that's what we're learning today, and this is a good thing. So with that being said, I will turn it back over to you now. Maria Nickolaou: Okay. So we talk about these qualifying taxes. So there are four tests that must be met for any foreign tax to qualify for the foreign tax credit. It must be a tax imposed on you. Now, what does that mean? A tax is considered paid or accrued only by the person on whom the foreign law imposes a legal liability for the tax, even if someone else remits it. Now, most of us can relate to this straightforward example that as an employee you have wages withheld by your employer. So in this case, the legal liability for the tax on those wages is on the employee even though the employer withheld it. And the same thing with investment income, when you have a payor via a withholding agent, the individual receiving the investment income, the taxpayer is the one who is legally liable for the tax on that, not the withholding agent. So it must be imposed on you. The second one is you must have paid or accrued the tax to the foreign country. Now, most individuals are on the cash method and they will by default take the foreign taxes into account when they are paid.

Now, this includes foreign taxes that relate to a different tax year. So for example, prepayments of foreign tax through wage withholding or estimated tax as long as the withholding and estimated tax is a reasonable approximation of the taxpayer's actual liability. So the third one is the foreign tax must be an income tax or tax in lieu of an income tax. So common sense says do not include any foreign levies such as gasoline taxes, penalties, fines, foreign real estate taxes, inheritance taxes, certain social security taxes, or value added taxes, and those are referred with that. And that is because none of those are income taxes, and if they're not income taxes, they do not qualify for the FTC. And finally, the last requirement is that the income tax be compulsory, meaning only the legal and actual amount of their tax liability. Now, this is one area we see a lot of non-compliance in. The amount of the foreign tax that qualifies is not necessarily the amount withheld, and I'd like to expand on that just a little bit more. So here we're going to talk about the treaty and statutory rate for FTC purposes. The U.S. has tax treaties with many countries, and under the terms of these tax treaties, residents or citizens of the U.S. can be taxed at a reduced rate or sometimes are even exempt from foreign taxes altogether. And this depends on the certain type of income they receive. The most common one that gets reduced rates is portfolio income. To pay only the legal amount of tax, an eligible taxpayer must invoke the tax treaty and you must provide a statement to the withholding agent requesting a lower treaty rate.

If they don't, it's almost certain that a statutory withholding rate is applied by the withholding agent, and generally that is always a higher rate. Now, that excess is not deemed compulsory and fails the previously listed four requirements. So if a lower treaty rate exists, the taxpayers are only allowed to claim the lower treaty rate. If they want that excess back, they have to invoke the treaty and file an amended return with the foreign country. So first you want to see if a treaty exists between the U.S. and the foreign country. If it does, determine if there is a lower rate applicable to that particular type of income. The IRS.gov website has the latest tax treaties, and you can search for them on that website by typing in the word tax treaties, and there's also a Publication 901 on tax treaties, that's a wealth of information. So, Veronica, I think it's time for our next polling question. Veronica Tubman: Why, yes, it is, and thanks. Okay, audience, our fifth polling question is taxpayer A earned $1,000 of passive income in Country X and had $150 withheld. Country X, their tax treaty stipulates a 10% withholding rate on passive income. What is the maximum amount of Country X tax Taxpayer A can claim for FTC purposes? Is it, A, $100? Is it, B, $200? Is it C, $300? Or is it D, the actual amount withheld by Country X? Okay, so take a minute and repeat the question again and then click in the radio button you believe most closely answers this question. So go ahead and make your selection, and I'll give you a few more seconds to do that. Okay, don't forget now, take a minute and repeat that question again, then click in the radio button you believe most closely answers this question. So go ahead and make your selection. Okay, we're going to stop the polling now, and we'll share the correct answer on our next slide. Let's see, what is that correct answer? And the correct answer is, A, $100. So let's take a look and see how everyone did. And I see that 71% of you responded correctly. So, Maria, can you provide us with a little bit of clarity to help our audience, please? Maria Nickolaou: Sure. So we want to look to see first, if there's a tax treaty and it says we do have one with this country, and it says that passive income has a treaty withholding rate of 10%. So 10% of the $1,000 of passive income is the $100, and that treaty rate is lower than the actual $150 withheld. Therefore, for FTC purposes you can only claim the $100. So it's the lower of the two. Veronica Tubman: Okay, Maria, we really appreciate that. And at this time, I'd like for you to keep us moving along. So, Maria, just keep moving along. Maria Nickolaou: All right. One of the things about foreign tax credit is income is divided into categories. And we have seven categories that are shown here. Now, the code state, the limitation I spoke of earlier is not only an overall limitation, but it must be calculated separately in each category of income. The foreign income and related taxes from one category cannot be combined with another. We're going to keep this short and sweet. The first category is 951A, and that is known as GILTI, Global Intangible Low Taxed Income. The second category is Foreign Branch, and those are generally business profits from a U.S. person that relate to a qualified business unit. The third category is Passive. What you'd expect interest, dividends, rents, royalties. The General category is actually a catch all for income from sources outside the U.S. that do not fall into one of the other separate categories. And it generally includes active business income and compensation of an individual as an employee. The other category that I want to say is income earned from activities that are conducted in sanctioned countries. Now, the Pub for FTC is Pub 514, and we suggest that that is reviewed every year, because the countries that are sanctioned change over time. Some go on the 901(j) list and some come off the list. So you want to check Pub 514 each year. The other category certain income resourced by treaty. So if there is a sourcing rule in an income tax treaty that treats U.S. source income as foreign source and you elect to apply the treaty, you would then put in this category, because it is income that normally would be U.S. source, but that is resourced by treaty as foreign source. So you have to look at the treaties for all this. Now, I want everyone to be aware that this category resourced by treaty is not the same as certain income that we just talked about that was affected by reduced treaty rates. And those were the passive categories that we generally just discussed. There are other categories, but I just want to be certain, when you say certain income resourced by treaty, that is different than reduced treaty rates that we talked about. And finally, there's a lump sum category that applies to income from a taxpayer, who receives a foreign source lump sum distribution retirement plan income and the taxpayer figures the tax on it using a special averaging treatment. In each of these categories, we'd have the limitation to compute the FTC, which is our next slide. So on our FTC overview slide, we said the third bullet was the limitation, and this law about calculating it by category was created to prevent foreign income taxes from reducing U.S. income taxes on U.S. sourced income. To state it another way, the tax policy is only to provide relief in instances, where there's double taxation, so U.S. tax on foreign source taxable income, FSTI. So, for example, if a taxpayer paid $100 of foreign taxes on some foreign income to the foreign country, but the U.S.

would tax that foreign income at $90, we would only allow the $90, it's as simple as that. We're not going to give you more than we would tax on. So the computation of the maximum allowed FTC is expressed as a formula that you see here on the slide. So if a person pays more tax to the foreign country on the foreign source income than would be due to the U.S. on that same income, then we will limit the amount that can be credited. So the first bullet talks about how the FTC is limited. The allowable credit is limited to the lesser of the amount paid or accrued, or the overall limitation on the FTC. And that limitation is the second bullet formula. You take your foreign source taxable income divided by your worldwide taxable income and that's for years that had exemptions, we paid before exemptions. And you multiply it by the pre-credit U.S. tax liability.

That is your limitation. And that is also done category by category. Now, there are a lot of people who have questions about the interplay of FTC and FEIE. They're intertwined many people abroad have foreign earned income in excess of the exclusion. Now, you may also have unearned income, and unearned income is not eligible for the foreign earned income. So both FEIE and FTC are two tax advantages, but they differ at their core as to the type of income they're being applied to. The objective of FEIE aims to exclude all or some of your foreign earned income from U.S. tax. It's almost like you haven't earned it at all. Now, on the other hand, the FTC reduces your U.S. income tax liability. And also the FEIE is more particular about your residents abroad than the FTC. Like Bethany said, to claim FEIE, you have tests to pass, one of which is either the bona fide residence or the physical presence test, whereas the FTC is less stringent. And you could apply the foreign tax credit no matter where you live or how long you stayed there. Now, both can produce tax savings, but they cannot be applied to the same dollar of income. And I know people have asked which is better? Well, generally, the FEIE is ideal if the tax rate in the host country is lower than that of the U.S. Meanwhile, you might benefit more from the FTC if the tax rate in the host country is higher than the U.S. So let's look at an example. You cannot get relief on income that is not subject to double taxation or income that is not taxed, right? I mean, the whole purpose is to alleviate double taxation. So think of it maybe in these terms, the 1040 is your worldwide amount and the Form 1116 is the foreign subset portion of those totals. So let's look at this example. We have gross foreign wages of $500,000 and the FEIE taken was $112,000.

That leaves net foreign source income of $388,000. So since the 1040 had worldwide taxable income reduced by the FEIE, we then want to go to the Form 1116 gross wages, and those must also be reduced by the exclusion amount. So when we think about adjustment income, we also want to think about the tax on that excluded income. Here we paid foreign taxes of $100,000. So we want to take that same ratio that was excluded. So we would take the $112,000 that was excluded over the $500,000 of foreign gross wages and we come up with a percentage of approximately 22.4%. And you multiply that, it's the allocable amount of the taxes paid. So that would be $22,400. Now, that is the reduction in the foreign taxes that correlates with the reduction percentage wise of the income you've excluded. And this reduction is going to be shown on Form 1116 Part 3 Line 12. So where you have reduced income for your foreign earned income exclusion, you must also reduce the foreign taxes paid on that excluded income. Now, let's talk about the timing of the credit. We talked earlier a little bit about the cash method taxpayer, they can elect to claim the foreign tax credit on the cash basis, which we referred to as the paid method or the accrual basis. And you do this by checking Part 2, there are two boxes on Part 2 of Form 1116. You elect the FTC, like I said earlier, simply by attaching the form to your return. Now, if the cash or accrual box is blank, the IRS will assume you've chosen the paid method. Now, be aware, an individual can elect the accrual method, but once you do, it's binding on all future years. Now, here we say generally a taxpayer is not allowed to make an election to use the accrued method on an amended return. And I'd like to talk a little bit about this, because there's been some recent developments. The general rule is a taxpayer cannot switch to the accrual method on an amended return. But for tax years beginning after 1228 of 2022, there is a new regulation, and I don't have it typed in here, I don't think, but it is 1.905-1(e)(2). And this regulation was enacted to provide a very limited circumstance to this general rule. It states if the year the election to claim the FTC on the accrual basis is made, that is the election year. If that election year is the very first year for which the taxpayer has ever claimed the FTC dollars, then they can elect an accrual basis on their amended return. And, of course, it would be binding on all subsequent years. And let me explain why this was carved out. A simple example here, Year one 2023, we have a U.S. taxpayer with foreign source income, and they paid foreign taxes, but for whatever reason, they never claimed FTC on their original return, nor have they ever had FTC in the past. Well, a year later, the taxpayer learns that, Oh boy, I didn't know this, but if I claimed FTC on the accrual method, I would get this really great benefit. Now they can claim their 2023 year one return, they can amend their 2023 year one return and claim it on the accrual method. And why is that? Because by them never having taken FTC in a prior year, they have not chosen or elected a method. So that is why this small exception was carved out. The taxpayer has never claimed it before, and they're claiming it for the first time on their amended return. So that's the only time you could switch to accrual. Let's talk now a little bit about all the taxes that are claimed perhaps cannot be utilized, because of the limitation we talked about. When foreign taxes paid are greater than the limitation. This puts a taxpayer in an excess credit position. This excess must first be carried back to the first preceding year and then forward to each of the 10 succeeding years, so back one, forward 10, and you must go back first. Now, there is one exception to the carry rule, Section 951A, our GILTI basket cannot carry under the law. So if you look at Form 1116 and the instructions, they will tell you to leave the carryover, carry back line on the GILTI basket Form 1116 blank. And this is the only category that cannot have a carry back or carryover.

Now, in the second bullet we have what is called excess limitation and that is where the limitation exceeded the qualified taxes paid. So you're either in an excess credit position or you have excess limitation. A couple of observations: First, you can't take FTC, if you have no foreign source income. That would be because the numerator would be zero on your limitation and it's the lesser of taxes paid or the limitation, so you would have zero all; second, if you never have any foreign source income in future years you would probably lose the ability to use that credit carryover; and finally, when you carry back or carry over excess credits, there must be excess limitation in that year to absorb the carryover. So those were just a couple of observations. I think it's Tracy's turn to take over. Tracy McFee: Yes. Thank you, Maria. So, up until now we've been talking about income taxes and ways to mitigate double taxation of income by either claiming a foreign tax credit or if eligible taking a foreign earned income exclusion. Now, we're going to change and talk about Social Security and Medicare Taxes. So Social Security and Medicare Taxes are payable on the wages of U.S. citizens and residents who work abroad for an American employer. So you may be asking yourself, who is an American employer? Well, the term American employer is defined in Code Section 3121(h), and it includes a corporation that's unorganized under U.S. federal or state law, an individual who is a resident of the United States, a partnership if two-thirds or more of the partners are U.S residents. A trust if all the trustees are U.S. residents, or the U.S. government or any of its instrumentalities. Social Security and Medicare, also known as FICA taxes, are also payable on the wages of U.S. citizens and residents who work abroad for a foreign person that's treated as an American employer under Code Section 3121(z). Or in certain cases, if the foreign affiliate of an American employer, meaning a foreign entity in which the U.S. Company has a 10% or greater interest, if the American employer agreed with the IRS to remit employment taxes on behalf of its U.S. citizens and residents employed by the foreign affiliate. Self-employed taxes are the equivalent of Social Security and Medicare Taxes paid by a self-employed individual. Self-employed U.S. citizens and residents are responsible for paying self-employment tax under the Internal Revenue Code if their net earnings from self-employment equal or exceed $400. And that's true regardless of where the self-employment activities occur. So whether you're self-employed either here within the United States or outside the United States, where the individual resides during the period of self-employment and whether the individual is claiming the foreign earned income exclusion. So the foreign earned income exclusion has no impact on a self-employed individual self-employment tax liability. So, Veronica, I think it's time for our next polling question. Veronica Tubman: So, Tracy, yes, it is. Okay, audience, our next polling question is a True or False. Self-employed U.S. citizens and resident aliens who live and work abroad must report and pay self-employment tax, if they had net earnings from self-employment of at least $400. So select, A, for True; or B, for False that they do not have to pay self-employment. So I'd like to ask that you click the radio button you believe answers the question. I'm going to give everyone a few more seconds to make your decision. True or False.

I think I'm going to go back for that one. This is a True or False.

Self-employment U.S. citizens and resident aliens who live and work abroad must report and pay self-employment tax, if they have net earnings from self-employment of at least $400. So select A for True or B for False, that they do not have to pay self-employment. I want you to click on the radio button you believe answers the question. Give you just a few more seconds to make your selection. And okay, audience, we're going to stop the polling, and we'll share the correct answer on the next slide. And let's see. And the correct answer is; A, true. And let me see, 93% of you responded correctly. I think that is absolutely a wonderful response rate. So we appreciate Tracy for that. Okay, Tracy, I think you're going to explain Totalization Agreements. Is that correct?

Tracy McFee: That's correct, Veronica. So you may be wondering what happens if someone's employment income or self-employment income possibly could be subject to U.S. Social Security and Medicare Taxes, as well as foreign Social Security and Medicare type taxes. So what if you live and work in a foreign country and are paying into a foreign Social Security system? Well, in that case, some countries have entered into what are called Totalization Agreements with the United States to prevent the payment of Social Security taxes to two jurisdictions on the same wage or self-employment income. And later in this presentation on the resources side, we'll provide a link to a list of those countries. If there is a Totalization Agreement in place between the United States and a foreign country, then the terms of that agreement will govern whether Social Security taxes must be paid to the U.S. Where a Totalization Agreement is in place, tax will not be owed to the U.S. that Social Security tax, if the terms of the agreement provide that the wages or net earnings from self-employment are subject only to foreign Social Security taxes and are exempt from U.S. Social Security tax. So how do you go about claiming an exemption for Social Security taxation in the U.S. under the terms of a Totalization Agreement, if you're an employee? Well, if you're an employee, either you or your employer should obtain a certificate of coverage or similar statement from the authorized official or agency of the foreign country verifying that your wages are subject to Social Security coverage in that foreign country. If the authorities of the foreign country won't issue the certificate or statement, well, you're not totally out of luck. In that case, you or your employer should get a statement from the U.S. Social Security administration saying that the wages are not covered by U.S. Social Security. Either way, once that certificate or statement is obtained either from the foreign government or foreign agency or from the U.S.

Social Security administration, a copy of that certificate or statement needs to be kept on file by your employer, so they should include a copy of the certificate or statement in their employer file. You don't have to send it into the IRS. Okay, so let's move on and talk about self-employed individuals. So how does this Totalization Agreement come into play, if you're self-employed?

Well, you still would need to request a certificate of coverage or similar statement from the appropriate agency of the foreign country. And if you can't get a certificate or statement from the foreign country, then you would need to contact the U.S. Social Security administration for a statement. When you're self-employed, it's a little different as far as how you show that you're exempt from U.S. self-employment tax under the terms of a Totalization Agreement. If you're exempt under the terms of a Totalization Agreement, if you're self-employed, what you need to do is you need to attach the certificate or statement to your tax return for each year that it applies. So you have to have multiple copies of that certificate or statement. And on the Line 4 self-employment tax, you would type in or write, Exempt See Attached Statement, to show that you're not going to be subject to U.S. self-employment tax. So you'd write, Exempt See Attached Statement, on the line for your tax return for self-employment tax. Okay, Veronica, do you have one more polling question for everyone? Veronica Tubman: Well, I absolutely do. Okay, audience, this is our last polling question. Under the terms of the Totalization Agreement, a U.S. citizen or resident may not have to pay what type of tax? Is it, A, Employment Taxes; B, Self-Employment Taxes; C, U.S.

income tax; D, Both A and B; or E, All of the above. And you know how this works. So review the question again then click in the radio button you believe closely answers this question. We'll give everyone a few more seconds to your selection. Okay, we're going to stop the polling now, and we'll share the correct answer on the next slide. And the correct answer is D, Both A and B under the terms of the Totalization Agreement, and that's the U.S. citizen or resident alien may not have to pay employment tax or self-employment taxes, which we have our acronym is SECA. Okay, guys, I'll see only that the response rate is 22%. Oh, no. Tracy, can you help us with this, please? Tracy McFee: Okay, Veronica, let's see if I can clarify things. So the question was under the terms of a Totalization Agreement, a U.S. citizen or resident alien may not have to pay what type of tax.

Totalization Agreements only apply to Social Security and Medicare Taxes, they do not apply to income taxes. Therefore, it would apply to Employment Taxes, which is item A in the question, Self-employment Tax, which was answer B in the question. It does not apply to U.S. income tax, which is answer C, because a Totalization Agreement does not cover income taxes, it only covers Social Security taxes. So the correct answer would be D, Both A and B. Hopefully that helps clarify things. Veronica Tubman: Tracy, we really appreciate. Thank you so much. And you're up again. Tracy McFee: Okay. So I'm going to move off of the topic of Social Security taxes and move on to a brief mention about tax credits. And this is just an awareness item for everyone that may be claiming the foreign earned income exclusion or the foreign housing exclusion or the foreign housing deduction. If that's the case, individuals who claim that foreign earned income exclusion and housing exclusion, but foreign housing deduction cannot claim either the earned income credit, the additional child tax credit, nor can they claim, as Maria explained, a foreign tax credit that is allocable to the income that you're excluding under the foreign earned income exclusion. Okay, so we've covered most of the technical material we were sharing today, I just want to leave you with some resources before we go to our Q&A session. So listed here on this slide are some resources that you may find helpful. For example, Publication 54 is the Tax Guide for U.S.

Citizens and Resident Aliens Abroad, and I would recommend that as a starting point in your research, if you have additional questions after this presentation. There's also Publication 514, which covers the Foreign Tax Credit for Individuals. There's Publication 901 on U.S. Tax Treaties.

Publication 4261 talks about whether you have foreign financial accounts, and provides information reporting for those. And Publication 5569 talks about the report of foreign bank and financial accounts, and that's the reference guide for it. Some additional links that you might find helpful on this slide include a link to pages for individual taxpayers with international aspects to the return on IRS.gov, and a link to the pages for information and reporting foreign bank accounts through the electronic filing system that's operated by FinCEN. Some additional resources you may find helpful shown here on this slide are taxpayer assistance numbers, one for taxpayers located inside the United States; and another for those that are residing outside the United States. Okay, as Bethany and, I believe, Maria may have mentioned, there are a number of Practice Units, which are technical write-ups and go into a lot of depth about the topics we discussed today. Those include several practice units on the foreign earned income exclusion, the foreign tax credit, and employment and self-employment taxes for U.S. individuals working abroad.

You can find all of the IRS Practice Units on these and other topics on the web address shown here on this slide. So, I think that covers the presentation portion of today's webinar. And I'm going to turn the mic over to Veronica for the question-and-answer session. Veronica? Veronica Tubman: Yes. Thank you so much. Okay. Hello, again, it's me, Veronica Tubman. I'll be moderating the question-and-answer session. But before we start the Q&A session, I want to thank everyone for attending today's presentation, Americans Abroad: Tax Obligations and Reporting Requirements. And earlier, I mentioned we want to know what questions you have for our presenters. So here is your opportunity. If you haven't input your questions, well, there's still time. Go ahead and click on the drop down arrow next to ask question field and just type in your question and click Send.

Bethany, Tracy, and Maria are all staying around to help us with your question. One thing, though, before we start, we may not have time to answer all the questions, but we'll answer as many as time allowed. So let's get started so that we can get in as many questions as possible.

Veronica Tubman: Okay, Bethany, an individual is a green card holder staying in India all year, working in an Indian company. Should he or she pay Social Security tax? If it is not mandatory, can he voluntarily pay Social Security? Bethany Krause: One is not able to voluntarily pay Social Security tax, unfortunately. So if this individual is working for a company that is not an American employer and not an affiliate of American employer, and there's no withholding being done on them, unfortunately, there is not the option to voluntarily pay in. Veronica Tubman: Okay. Thanks, Bethany. Okay, Tracy, this question is for you. Can you file the 4868 between April 15 and June 15, if you are overseas as of April 15, but won't be able to file until after June 15? Tracy McFee: Okay, I know that wasn't very clear when we were talking about the extension, so let me clarify.

So if you qualify for the 2-month extension, because you live or work outside the United States, but are unable to file your return by the automatic 2-month extension date of June 15, you are allowed an extension to October 15. And you have to request that by filing the 4868 application for automatic extension of time to file. And that either can be done electronically or on paper, but you have to submit it before the automatic 2-month extension date. So your extension request to get an extension to October 15 has to be submitted on Form 4868, and it has to be filed before June 15, so it has to be filed no later than June 15. I want to also mention that even if you're allowed an extension, you will have to pay any interest on any tax not paid by the regular due date of your return or April 15. So it's possible that there is an extension to pay to June 15, but it doesn't stop the accrual interest on any unpaid tax. So hopefully that clarifies that as well. Veronica Tubman: Thank you very much, Tracy. Okay, Bethany, this one's for you. The taxpayer moves back to the U.S. in the middle of the year. Does he or she still qualify for partial foreign income rule? Bethany Krause: Okay, so in a situation where someone moves abroad in the middle of the year, and that's probably pretty common, I mean, I don't think most people move on December 31 or January for some. In a situation where an individual arrives in a foreign country and begins working there mid-year, it kind of depends on as time goes by, right? You don't always know up front what's going to happen. And so they would have to wait and see if they actually do become a bona fide resident or qualify under the physical presence test. Many people will choose the physical presence test for that initial year, but of course they have to wait until that 12-month period has gone by. And to that end there is an extension that can be filed, but they still need to as Tracy was mentioning earlier, people do need to at least pay by the due date what they think they're going to owe. So let's say that I moved on July 5 to a foreign country and that was my first full day of presence there. Then I would have to wait until July 4 of the following year to know that I met the physical presence test. Or at least I would have to wait until, let's say, I didn't leave at all. Well then I guess shortly before that I would be able to see that I'm going to make that 330 full midnight to midnight days. A person could also potentially have qualified as a bona fide resident, but again, time bears that out. And I do want to mention that qualifying under the physical presence test is generally easier than qualifying under the bona fide residence test.

A person who doesn't even meet the physical presence test, it's rather unlikely that they would be a bona fide resident. I hope that helps to answer it though. Veronica Tubman: Hey, I appreciate that. Tracy, you're up. The question says do you need to file an automatic extension for the FBAR's 114. And if that is the case, what is the form for the extension filed? Tracy McFee: Okay.

Now, I did mention earlier in the presentation that the FBAR is generally due by April 15.

However, there's an automatic extension to October 15, if you are unable to meet the FBAR annual due date of April 15. Now, there is no form that's required to request an extension to file the FBAR. And if you need further information about it, you can see the FinCEN's website that was provided in the resources slide, I believe, for additional information. But there is no form or statement you have to submit to get that automatic extension to October 15 if you didn't file your FBAR by April 15. Veronica Tubman: That's cool. Thanks a lot, Tracy. So I'm going to stay with you for our next question. So one of our audience members is not clear on the following requirements and the difference in the amount $200,000 and the $400,000 versus the $300,000 and the $600,000. So can you give us some clarity on that? Tracy McFee: Yeah, I'm glad for the opportunity to clarify that, because I do think it was a little confusing that was back on the slide where we were talking about other information reporting requirements. And this was specific to the filing requirement for Form 8938, which is the Statement of Specified Foreign Financial Assets. So the thresholds for having to file the Form 8938 are for individuals that are any other status other than married filing jointly. So single, head of household, married filing separate, qualifying widow or widower, then you would have to file the Form 8938 if your specified foreign financial assets were $200,000 as of the last day of the tax year, or if it was a $300,000 value of those specified foreign financial assets at any time during the tax year. So you look at the last day of the year, and the balance throughout the entire year, and then if it's more than $200,000 as of the last day of the year, you have to file the Form 8938, unless you're married filing joint. If it was $300,000 at any time during the year, you would have to file the Form 8938 for anyone who was other than married filing jointly. Now, those thresholds are higher if you're married filing joint. If you're married filing jointly, if your balance of specified foreign financial assets is equal to or exceeds $400,000 at the last day of the tax year, December 31, then you would have to file the Form 8938 for that year. Or if at any time during the year that calendar year the balance of your specified foreign financial assets exceeded $600,000 at any time during the year, if you're married filing joint, then you would have to file Form 8938 for that tax year. So hopefully that clears it up. Veronica Tubman: Okay. We appreciate you. Okay, Maria, I have two questions for you, as a matter of fact. How does a tax treaty relate to the foreign tax credit? Maria Nickolaou: Well, tax treaties absolutely can affect your treatment of both income and treaty rates between the U.S. and a particular country. Not only can it affect the rate taxed by certain countries, but as I mentioned earlier, there are provisions in the treaties that may and I think there was a question about this that may affect the sourcing of an item. So, for example, income resource by treaty, okay? So if you are a U.S. citizen or resident living in a foreign country, they may be able based on that country's treaty with the United States, they may source something as foreign when it's U.S. And similarly, if it's U.S., they may source it foreign. So you do have to look at the treaties, Pub 901 explains all of this. And I did want to point out there is Pub 597 that has information on the United States/Canada treaty. So that was Pub 597. But Pub 901 generally provides a comprehensive list. And as far as can you give me an example? You would have to look at each country for that. And off the top of my head, I have to look it up just like everyone else. Not sure exactly Pub 901 does talk about the effect of the treaties. Now, remember, if you're taking a treaty position and we didn't talk about this, but there is Form 8833, and you can look up that form and instructions. So sometimes you have to submit that form, when you're taking a treaty position. So between Pub 901 for the tax treaty, and also I wanted to point out if you go to IRS.gov and you go and type in tax treaties, not only do they have a list of every country that we have a treaty with, but they also have treaty tables that talk about the different types of income, they talk about how to research tax treaties. So there's a wealth of information on IRS.gov about how the treaties might affect your taxpayer. Veronica Tubman: Hey Maria, thanks so much for the information. So I have a question for you, if a U.S. citizen lives abroad and has income from USA property, what reporting requirements does he has? Maria Nickolaou: Okay, there's a little static going on. If there is a taxpayer and I'm assuming a U.S. citizen or resident living abroad, who has U.S. rental, was that correct? Veronica Tubman: That's correct.

Maria Nickolaou: Okay, well, the U.S. taxes worldwide income, it doesn't matter where the income is earned or where you live. So that absolutely gets reported on a Schedule E. Now, if depending on the situation in that foreign country you have to pay the foreign country any tax, you would also just like we get the foreign tax credit sometimes you'd have to look at the treaty to make sure if there was double taxation if there is any relief. But it sounds like assuming the foreign country they're not filing a tax return there. There is no double taxation, but it is reported on 1040 Schedule E, it doesn't matter where you live or where it's earned. Veronica Tubman: Okay. Thanks so much. Okay. Tracy, one from our audience, I was a little confused, can both foreign earned income exclusion and foreign tax credits be claimed on the same tax return? Tracy McFee: So the answer is yes, if the taxpayer meets the requirements. So if the individual meets the requirements for the foreign earned income exclusion, they could file a Form 2555, I remember, Bethany went over those requirements. You have to have foreign earned income; you have to have a foreign tax home; you have to be either the bona fide residents or the physical presence test. And unless you're working in support of the U.S. military in a combat zone, you cannot have a U.S. abode. So if you meet all the requirements of the foreign earned income exclusion, you can file the Form 2555 attached your return. If you have income in excess of the amount that can be excluded or income that is foreign source income that is not eligible for the exclusion, then if you've paid foreign taxes, you could file the Form 1116 to figure your applicable foreign tax credit. So both the 2555 for the foreign earned income exclusion and the Form 1116 could be attached to the same Form 1040. Veronica Tubman: Okay. Thank you for that. Why is income earned in Antarctica not foreign? Bethany Krause: Hi, This is Bethany. Was that one for me. There's a lot of static were you talking for me? Veronica Tubman: Yes, I was, Bethany. I do apologize for that. Bethany Krause: Thank you. Yeah, it's not your fault. It's just kind of a static sound today. Antarctica is not a foreign country. It's not under the jurisdiction at least the world doesn't recognize that it's under the jurisdiction of any particular government. So it isn't a foreign country and that's why income earned there is not eligible for the foreign earned income exclusion. Also, similarly, I think I saw another question about pilots and flying and when a person's flying in a plane or perhaps working on a ship over international water, that is also not foreign earned income. So we see this particularly with flight crews that they have to make allocations based on whether the income is earned in the United States, in a foreign country, or in a place that is neither, because the only portion that they're able to exclude if they meet all the other qualifications.

So, let's say, that I'm a member of a flight crew and I live in a country other than the United States, and I fly back and forth, even to another foreign country that I go over the ocean a considerable distance, let's say, I travel from Europe to Australia. Then a good deal of time would be spent over international water, or another way of saying it is in international airspace.

And the only portion that would be excludable would be when I'm in a foreign country such as one of the European countries or Australia in or over it. So it may be that before I land I'm already over a foreign country, but time spent over international waters, time spent over Antarctica, that is not counting for the foreign earned income exclusion. So duties that are being performed that I'm being paid for in those locations would not be excludable. I hope that helps. Veronica Tubman: Thanks a lot, Bethany. Okay, this question for, Maria, where can I find more information about categories? Maria Nickolaou: Well, we have several. First of all, Pub 514 goes through all the categories, also the instructions to the 1116. But more importantly, as I think Tracy mentioned, if you go to IRS.gov and type in practice units in the search box and you scroll, there is a practice unit that's been published that goes into far more detail of each category, and I believe you have to search for it by title. And I know categorization of income for FTC purposes or FTC categories of income. It's one of those titles that would be the area that practice unit would have the most detailed information. Veronica Tubman: Thanks. Much appreciated. Okay, Tracy, if a U.S.

citizen marries a nonresident and does not elect to file a joint return, so you said that they can file an unmarried or head of household with the nonresident spouse? Tracy McFee: The answer is - let me clarify. So if a U.S. citizen or resident is married to a nonresident and they're not choosing to file a joint return, so they're not making either a 6013(g) election or a 6013(h) election under the Internal Revenue Code. Then their only option would be to file married filings separately, because your filing status is determined based on your marital status as of the last day of the year. So U.S. citizen who is married or residents married to a nonresident and that is in fact married as of December 31 of that tax year would be considered married. So if you're not filing jointly, then your option is married filing separately. The only way that a U.S. citizen or resident who's married to a nonresident can file a head of household is if they had a qualifying dependent in order to claim that head of household filing status. So they would have to have someone other than the nonresident spouse, who is eligible for them to claim the head of household filing status. So the nonresident spouse cannot qualify as a dependent for purposes of the head of household filing status. It has to be someone else, either a child or a parent, perhaps. Veronica Tubman: Okay. So this is for Bethany. For the physical presence test, can you have two 12 consecutive month periods in the same year, for example - I'm sorry, I apologize. I have a lot of questions, and they are really, really good questions, and I'm just sure that I give everybody the best information. So let me start that again. For the physical presence test, you have two 12 consecutive months. And that's for Bethany. Okay. Bethany Krause: Yes. It's a little staticky, so I'll probably repeat what I think I heard you say that for the physical presence test, is it possible to have two 12 consecutive month periods in the same tax year? And that is correct. The person can do that. And so let's say, for example, that they can do that so long as in each of those 12 consecutive month periods, they have 330 full midnight to midnight days. So I think I saw that question in the lineup or queue of questions here. And in that case, the person was saying that, for example, for the 2022 tax year, what if the first qualifying period was March 15 of 2021 to March 14 of 2022, and then a second qualifying period of June 1, 2022 through May 31 of 2023.

And the person stated, and I didn't do the math, but they stated that that would yield 73 qualifying days for the first period and 214 qualifying days in the second period for a total of 287 qualifying days in the tax year 2022. And, of course, they also provided that caveat in their question, that during each of those 12 consecutive month periods, there were 330 full days in a foreign country. So this person had 330 full days in each of two different 12-month periods. And so the answer to that is yes, that would certainly work. Provided, of course, that all of the other requirements are met, tax home abode, foreign earned income, obviously, and a valid election. Veronica Tubman: Okay. Appreciate that. Hey, Maria, this one's for you. What category of foreign income is sale of foreign real estate property? This Schedule D filed on the 1040 return, and any foreign income taxes allowed for FTC to offset U.S. taxes. Maria Nickolaou: If you have real estate, that is a capital asset. So, yes, it would be on Schedule D, unless it's used in a trader business and they'd be on a 4797. But, yes, any foreign income taxes paid if they are qualified foreign income taxes. And you'll have to look, because every country is different. So you have to see what those taxes are that are being paid. If they meet the four requirements for the income tax, then they would be put in the passive category on the 1116 gains from sales, dividends, interest, rents, royalties, that kind of stuff goes in the passive category. Veronica Tubman: Okay. I appreciate that. Okay, Bethany, how often does the IRS disallow the FEIE, if they file a return later than 1 year from the original due date? Bethany Krause: Okay, well, I want to describe there's a difference between filing the return and filing the election. So the election is made on the first year to which it applies. So if I, for example, filed a 2555 for tax year 2015, and that was my election year, and then I didn't do anything to incur some sort of a deemed revocation, meaning I wasn't double dipping and claiming FTC on the excluded income, meaning for tax credit on the excluded income. And I wasn't taking any inconsistent return positions that way.

So assuming there is nothing that would have deemed me revoked, that election would stay in place.

And so if, let's say I was late filing for 2018, but I had been maintaining my election. Then 2018 is not the election year, so that would not affect my election, the fact that I was perhaps late filing my 2018 taxes. I also want to say along with that, because I think I saw another question in the string of questions about a person who let's say a company assigns me to work in a European country and I'm over there for several years, and then they put me back to the U.S. So my employer sends me back to the United States. So for a few years, I don't have any foreign earned income that I can exclude, right, which is not an inconsistent position because I'm not working overseas during those years, I have no foreign earned income. So my election is still in place. So should my employer then send me to a different country somewhere else in the world, and I start working overseas in another country. And, again, provided I meet the tax home, and the abode, and the foreign earned income, and all the other tests in order to claim the exclusion, but providing I meet all the other requirements, my election is still valid, it's still in place. And I can continue from that point onward to claim the foreign earned income exclusion in the new country, provided again that I meet all of the requirements. But as far as a late election, meaning I've never filed or perhaps I had a revocation and now I'm starting in again. In that case, the slide stated that they have up until a year after and this person was asking if there's anything beyond that. The truth is there is, it gets a little convoluted. It's in the regulation. And I would suggest that if a person has a question, they may be turned there. But just to put it in a nutshell, beyond what's on the slide, if the IRS did not discover the failure to elect. Then one can still make that late election. And then if we did discover, but there's no additional tax due after making the election, then I believe that's another caveat. So I think the keys are no additional tax due and IRS not having discovered or if we did discover you didn't owe any tax anyway after the exclusion. And so, there are a couple of other possibilities for making a late election. Now, if the IRS discovers you didn't file a tax return that is us discovering that you didn't make an election. The courts have said that that is the equivalent of IRS knowing that you did not elect foreign earned income exclusion. So that in that case, the IRS would have discovered it. I hope that answers the question. Veronica Tubman: Okay, thanks again. Audience, that's all the time we have for questions. I want to thank our presenters for sharing knowledge and expertise for answering your question. But before we close, Tracy, can you start us off with some key points from today's webinar? Tracy McFee: Yes, Veronica, of course I can. So the main point we want you to take away is that the U.S. generally taxes its citizens and residents on worldwide income. So even if you live or work outside the United States and you're a U.S. citizen or resident, you still will usually have a filing obligation with the U.S. And also those who live and work in a foreign country and who meet the requirements may be able to exclude foreign earned income, as definitely explained. So, Maria, I think you have some key points on foreign tax credit. Maria Nickolaou: All right. Yeah. First, I would say the FTC alleviates all or part of the double taxation. So you have to have double taxation and then there is some relief there. And I wanted to also point out, there are two new schedules to the Form 1116 starting in 2021, and if necessary you can attach them. Schedule B breaks out all of the carryovers and carry backs of your foreign taxes and you can find the instructions for those forms, obviously on IRS.gov. And Schedule C deals with foreign tax redeterminations, which we have talked about in prior events. And basically that is when there is a change to your foreign taxes, your foreign tax credit that you've claimed. We're not going to get into that, but Pub 514 and the instructions to the 1116 discuss both of those new schedules. And then as far as for FBARs, anytime you have a financial interest or signature authority, where the value exceeds $10,000 at any time during the year, you must file this form. And, I think, I give it back to Tracy. Tracy McFee: Yes, Maria. So we talked about employment taxes being Social Security and Medicare taxes and self-employment taxes. So U.S.

citizens and residents working abroad generally are going to be subject to these types of Social Security taxes unless there's the terms of a Totalization Agreement or another provision such as working for a foreign employer abroad that may provide an exemption from those Social Security taxes. Now, a self-employed U.S. citizen or resident, you're going to be responsible for paying self-employment tax, if you're net earnings from self-employment equal or exceed $400 regardless of where you live or work, unless the terms of a Totalization Agreement apply that exempt you from U.S. self-employment tax. And finally, if the United States has entered into such a Totalization Agreement with a foreign country in which the wages or net earnings from self-employment were earned, then the terms of that agreement govern whether Social Security or Medicare taxes must be paid to the United States. And you would have to obtain it if you're subject to a Totalization Agreement, you would need to obtain either a certificate or statement from the foreign country or request one from the U.S. Social Security administration. And, Veronica, that's all I have. I'm going to turn it back to you to wrap up our presentation. Veronica Tubman: Thanks again, Tracy.

Audience, we are planning additional webinars throughout the year. To register for an upcoming webinar, please visit IRS.gov keyword search Webinars, and select the Webinar for Tax Practitioners or Webinars for Small Businesses. When appropriate, we will be offering certificates, CEs for upcoming webinars. We invite you to visit our video portal at www.irsvideos.gov. There you can view archived versions of our webinars. Again, continuing education credits or certificates of completion are not offered if you view archived versions of any of our webinars on the IRS Video Portal. Another big thank you to Bethany, Tracy, Maria for a great webinar and for sharing their expertise. I also want to thank you for attending today's webinar, Americans Abroad: Tax Obligations and Reporting Requirements, if you attended today's webinar for at least 100 minutes after the official start call, you will receive a certificate of completion. That you can use with your credentialing organization for two possible CE credits. If you stayed on for at least 50 minutes from the official start time of the webinar, you will qualify for one possible CE credit.

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