Publication 54 - Tax Guide For U.s. Citizens And U.s. Citizens Abroad

Example. You are transferred by your em-

information needed to properly figure the mov-

Taxes of Foreign

ployer on November 1, 2000, to Monaco. Your

ing expense deduction. See Extensions under

tax home is in Monaco, and you qualify as a

When To File and Pay in chapter 1.

Countries and

bona fide resident of Monaco for the entire tax

If you do not request an extension, you

year 2001. In 2000 you paid $6,000 for allowable

U.S. Possessions

should figure the part of the moving expense

moving expenses for your move from the United

that you cannot deduct because it is allocable to

States to Monaco. You were fully reimbursed

the foreign earned income you are excluding.

(under a nonaccountable plan) for these ex-

You can take either a credit or a deduction for

penses in the same year. The reimbursement is

You do this by multiplying the moving expense

income taxes paid to a foreign country or a U.S.

included in your income. Your only other income

possession. Taken as a deduction, foreign in-

by a fraction, the numerator (top number) of

consists of $14,000 wages earned in 2000 after

come taxes reduce your taxable income. Taken

which is your excluded foreign earned income

the date of your move, and $80,000 wages

as a credit, foreign income taxes reduce your tax

for the year of the move, and the denominator

earned in Monaco for 2001.

liability. You must treat all foreign income taxes

(bottom number) of which is your total foreign

Because you did not meet the bona fide

in the same way. You generally cannot deduct

earned income for the year of the move. Once

residence test for at least 120 days during 2000,

some foreign income taxes and take a credit for

you know your foreign earnings and exclusion

the year of the move, the moving expenses are

others. However, regardless of whether you

for the following year, you must either:

for services you performed in both 2000 and the

take a credit for foreign income taxes, you may

following year, 2001. Your total foreign earned

be able to deduct other foreign taxes. See De-

1) Adjust the moving expense deduction by

income for both years is $100,000, consisting of

duction for Other Foreign Taxes, later.

$14,000 wages for 2000, $80,000 wages for

filing an amended return for the year of the

There is no rule to determine whether it is to

2001, and $6,000 moving expense reimburse-

your advantage to take a deduction or a credit

move, or

ment for both years.

for foreign income taxes. In most cases, it is to

2) Recapture any additional unallowable

You exclude the maximum amount under the

your advantage to take foreign income taxes as

amount as income on your return for the

foreign earned income exclusion and have no

a tax credit, which you subtract directly from

following year.

housing exclusion. The total amount you can

your U.S. tax liability, rather than as a deduction

exclude is $90,667, consisting of the $78,000

in figuring taxable income. However, if foreign

If, after you make the final computation, you

full-year exclusion for 2001 and a $12,667

income taxes were imposed at a high rate and

have an additional amount of allowable moving

part-year exclusion for 2000 ($76,000 times the

the proportion of foreign income to U.S. income

expense deduction, you can claim this only on

fraction of 61 qualifying bona fide residence

is small, a lower final tax may result from deduct-

an amended return for the year of the move. You

days over 366 total days in the year). To find the

ing the foreign income taxes. In any event, you

cannot claim it on the return for the second year.

part of your moving expenses that is not deducti-

should figure your tax liability both ways and

ble, multiply your $6,000 total expenses by the

then use the one that is better for you.

fraction $90,667 over $100,000. The result,

You can make or change your choice within

Forms to file. Report your moving expenses

$5,440, is your nondeductible amount.

10 years from the due date for filing the tax

on Form 3903. Report your moving expense

return on which you are entitled to take either the

You must report the full amount of the

deduction on line 26 of Form 1040. If you must

deuction or the credit.

moving expense reimbursement in the

reduce your moving expenses by the amount

year in which you received the reim-

CAUTION

allocable to excluded income (as explained later

Foreign income taxes. These are generally

bursement. In the preceding example, this year

under How To Report Deductions), attach a

income taxes you pay to any foreign country or

was 2001. You attribute the reimbursement to

statement to your return showing how you fig-

possession of the United States.

both 2000 and 2001 only to figure the amount of

ured this amount.

foreign earned income eligible for exclusion for

Foreign income taxes on U.S. return. For-

For more information about figuring moving

each year.

eign income taxes can only be taken as a credit

expenses, see Publication 521.

on Form 1040, line 43, or as an itemized deduc-

Move between foreign countries. If you

tion on Schedule A. These amounts cannot be

move between foreign countries, your moving

included as withheld income taxes on Form

expense is allocable to income earned in the

1040, line 59.

year of the move if you qualified under either the

Contributions to

Foreign taxes paid on excluded income.

bona fide residence test or the physical pres-

You cannot take a credit or deduction for foreign

ence test for a period that includes at least 120

Individual Retirement

income taxes paid on earnings you exclude from

days in the year of the move.

tax under any of the following.

Arrangements

New place of work in U.S. If your new place

1) Foreign earned income exclusion.

of work is in the United States, the deductible

Contributions to your individual retirement ar-

moving expenses are directly connected with

2) Foreign housing exclusion.

the income earned in the United States. If you

rangements (IRAs) that are traditional IRAs or

3) Possession exclusion.

treat a reimbursement from your employer as

Roth IRAs are generally limited to the lesser of

foreign earned income (see the discussion in

$2,000 or your compensation that is includible in

4) Extraterritorial income exclusion.

chapter 4), you must allocate deductible moving

your gross income for the tax year. Therefore,

If your wages are completely excluded, you can-

expenses to foreign earned income.

do not take into account compensation you ex-

not deduct or take a credit for any of the foreign

clude under either the foreign earned income

Storage expenses. These expenses are at-

taxes paid on these wages.

exclusion or the foreign housing exclusion. Do

tributable to work you do during the year in

If only part of your wages is excluded, you

not reduce your compensation by the foreign

which you incur the storage expenses. You can-

cannot deduct or take a credit for the foreign

not deduct the amount allocable to excluded

housing deduction.

income taxes allocable to the excluded part. You

income.

find the taxes allocable to your excluded wages

If you are covered by an employer retirement

by applying a fraction to the foreign taxes paid

plan at work, your deduction for your contribu-

Recapture of Moving

on foreign earned income received during the

tions to your traditional IRAs is generally limited

Expense Deduction

tax year. The numerator (top number) of the

based on your modified adjusted gross income.

fraction is your excluded foreign earned income

This is your adjusted gross income figured with-

If your moving expense deduction is attributable

received during the tax year minus deductible

out taking into account the foreign earned in-

to your foreign earnings in 2 years (the year of

expenses allocable to that income (not including

come exclusion, the foreign housing exclusion,

the move and the following year), you should

the foreign housing deduction). The denomina-

or the foreign housing deduction. Other modifi-

request an extension of time to file your return

tor (bottom number) of the fraction is your total

cations are also required. For more information

for the year of the move until after the end of the

foreign earned income received during the tax

following year. By then, you should have all the

on IRAs, see Publication 590.

year minus all deductible expenses allocable to

Page 30

Chapter 5 Exemptions, Deductions, and Credits

Publication 54 - Tax Guide For U.s. Citizens And U.s. Citizens Abroad - 2001 Page 30

Related Articles

Related forms

Related Categories