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Bona Fide residency test - double taxation help

Bona Fide residency test - double taxation help

Old Apr 28th 2012, 4:14 pm
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Default Bona Fide residency test - double taxation help

I was living in the UK for 14 years and having been filing my taxes in the usual way as an American living abroad.

I moved back to the US on Dec 10, 2010. I filed my taxes for 2010 in the way I had been doing it all those other years.

However, it just dawned on me that I shouldn't have! I don't think I pass the Bona Fide or Physical presence test for 2010. I need to double check my dates but I believe I wasn't physically abroad for 330 days (because of a vacation earlier in the year to the USA). I considered myself a resident of the UK until December 31, 2010 but I have no idea why I did that now! I earned substantially less than the $90k (or whatever it is) you are allowed under the double taxation agreement, so I figured for ease, I would continue filling in this tax return in the way I had been doing before. If I amend it, will I be taxed twice? Or are there other laws in the double taxation treaty that will protect me even if I can't take the foreign earned income exclusion. Thanks!
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Old Apr 28th 2012, 5:26 pm
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Default Re: Bona Fide residency test - double taxation help

The $90k you mention isn't in the double tax treaty, it's the U.S. Foreign Earned Income Exclusion provision. Or are you asking about something else?
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Old Apr 28th 2012, 5:31 pm
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Default Re: Bona Fide residency test - double taxation help

Sorry, I think I'm confused. I've been claiming the foreign earned income exclusion for many years because I always passed both tests. But now I think I don't pass those tests (just!) for 2010. I paid my UK taxes on my income. I'm assuming I don't have to pay taxes in the US as well but I don't know what to do if I can't claim the foreign earned income exclusion.
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Old Apr 28th 2012, 5:34 pm
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Default Re: Bona Fide residency test - double taxation help

If you can't claim the foreign earned income exclusion, then you can claim a credit for foreign tax paid.
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Old Apr 28th 2012, 6:23 pm
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Default Re: Bona Fide residency test - double taxation help

You could amend your return to take foreign tax credits instead but the results will likely be the same. If you don't amend your return and get audited, there won't likely be any penalties since you probably won't owe any taxes anyway to the IRS even though you filed incorrectly.
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Old Apr 28th 2012, 7:11 pm
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Default Re: Bona Fide residency test - double taxation help

Originally Posted by Michael View Post
You could amend your return to take foreign tax credits instead but the results will likely be the same. If you don't amend your return and get audited, there won't likely be any penalties since you probably won't owe any taxes anyway to the IRS even though you filed incorrectly.
+1

First, re-read the rules and double check your calculations. It sounds like you're on the boarder line.

If the IRS has not already contacted you over the FEIE, then right now you'll have time to take corrective action. I only suggest corrective action since there has been a Treasury group investigating the FEIE situations.

Filing an amended return is a standard situation, and should cause no undue alarm given your situation. A 1040X is a very normal occurence for the IRS. Just use form 1116 (IF you don't qualify for FEIE) instead of 2555. You may come out in even better shape.

Now...DON'T read this link if you are in panic mode. Only read it if you decide you want to take action. It may support that action. It's the Treasury document that suggests increased observance of FEIE filings, and it's why I suggest you may want to take corrective action.

http://www.treasury.gov/tigta/auditr...01040091fr.pdf

A recent posting on another site told the tale of someone who had been contacted. Even though the the situation was different, and the person should not have been contacted, it did get a bit messy. If you'd like, I'll post a link. It's where the above document came to light.
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Old Apr 28th 2012, 8:57 pm
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Default Re: Bona Fide residency test - double taxation help

When you say 'double check your calculations', I don't see how that would change things. I only earned about $50k that year. And would you clarify what you mean when you say I might come out in better shape? I always file the 2555ez.

I'm nervous amending because I ticked the box saying I could take the exclusion - I didn't do it deliberately (I didn't even think about it because I've been doing it for many years!), but I hate to bring attention to myself. If they do audit and discover I should have take the foreign tax credit instead, would they really not penalize? What would I say in the letter? I accidentally said I could take the exclusion but I mean to take the foreign credit...?
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Old Apr 28th 2012, 9:58 pm
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Default Re: Bona Fide residency test - double taxation help

Originally Posted by carmen blue View Post
When you say 'double check your calculations', I don't see how that would change things.
I meant the calculations of days for the FEIE. Sorry if I was unclear.

Originally Posted by carmen blue View Post
And would you clarify what you mean when you say I might come out in better shape? I always file the 2555ez.
Form 2555ez does not allow many credits. Form 1116 does. (Unless you have children that would qualify for the child credit, this probably won't effect you. Although I'm not sure you can change filing status.) Form 1116 will more than likely give you excess credits that you can use if you were to return to the UK in the next 10 years.

Originally Posted by carmen blue View Post
I'm nervous amending because I ticked the box saying I could take the exclusion - I didn't do it deliberately (I didn't even think about it because I've been doing it for many years!), but I hate to bring attention to myself.
Many people file an amended 1040X when they discover that they may be able to get additional credits or tax rebates by using form 1116 and ditching form 2555ez. From other forums, it appears it happens often.

Originally Posted by carmen blue View Post
If they do audit and discover I should have take the foreign tax credit instead, would they really not penalize?
Sorry, there are no promises when it comes to the IRS. But the likely answer is no, as long as you filed the original 2010 return on time.

Originally Posted by carmen blue View Post
What would I say in the letter?
You don't send a letter. You just file the amended return. There is a space in Part III of 1040X to say why you're amending. You explain you're 'Replacing form 2555 with form 1116'. End of story.

http://www.irs.gov/pub/irs-pdf/f1040x.pdf

Last edited by theOAP; Apr 28th 2012 at 10:08 pm. Reason: add link
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Old Apr 29th 2012, 12:23 am
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Default Re: Bona Fide residency test - double taxation help

Originally Posted by carmen blue View Post
When you say 'double check your calculations', I don't see how that would change things. I only earned about $50k that year. And would you clarify what you mean when you say I might come out in better shape? I always file the 2555ez.

I'm nervous amending because I ticked the box saying I could take the exclusion - I didn't do it deliberately (I didn't even think about it because I've been doing it for many years!), but I hate to bring attention to myself. If they do audit and discover I should have take the foreign tax credit instead, would they really not penalize? What would I say in the letter? I accidentally said I could take the exclusion but I mean to take the foreign credit...?
Normally there isn't any penalty when there isn't any taxes owed.
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Old Apr 29th 2012, 2:41 am
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Default Re: Bona Fide residency test - double taxation help

Originally Posted by carmen blue View Post
I was living in the UK for 14 years and having been filing my taxes in the usual way as an American living abroad.

I moved back to the US on Dec 10, 2010. I filed my taxes for 2010 in the way I had been doing it all those other years.

However, it just dawned on me that I shouldn't have! I don't think I pass the Bona Fide or Physical presence test for 2010.
You can take a "part year exclusion" for the time you were UK tax resident.

http://www.irs.gov/businesses/small/...=96980,00.html

Part Year Exclusion

Part-year exclusion. If you qualify under either the bona fide residence test or the physical presence test for only part of the year, you must adjust the maximum limit based on the number of qualifying days in the year. The number of qualifying days is the number of days in the year within the period on which you both:

Have your tax home in a foreign country, and
Meet either the bona fide residence test or the physical presence test.
For this purpose, you can count as qualifying days all days within a period of 12 consecutive months once you are physically present and have your tax home in a foreign country for 330 full days. To figure your maximum exclusion, multiply the maximum excludable amount for the year by the number of your qualifying days in the year, and then divide the result by the number of days in the year.

Physical presence test

Under the physical presence test, a 12-month period can be any period of 12 consecutive months that includes 330 full days. If you qualify under the physical presence test for part of a year, it is important to carefully choose the 12-month period that will allow the maximum exclusion for that year.

NOTE: Forms 2555 (PDF) and 2555-EZ (PDF) will automatically help you to do these computations.
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Old Apr 29th 2012, 2:55 am
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Default Re: Bona Fide residency test - double taxation help

Why do you not meet the bonafide residence test? All you have to do is meet one of the tests. If you said resident until Dec 10 instead of Dec 31, it only shaves off maybe $5000 from the maximum exclusion of approx $92k. Your income was under that so all of yours would still be excluded.
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Old Apr 29th 2012, 3:42 am
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Default Re: Bona Fide residency test - double taxation help

Moxie and Nun - I had no idea this part-year exclusion exists! Yes, I did say I was a resident until early December, so that's why I don't believe I qualified as a bona fide resident.
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Old Apr 29th 2012, 4:25 am
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Default Re: Bona Fide residency test - double taxation help

Originally Posted by carmen blue View Post
Moxie and Nun - I had no idea this part-year exclusion exists! Yes, I did say I was a resident until early December, so that's why I don't believe I qualified as a bona fide resident.
You were a bona fide non-US resident because you were resident in the UK for 12 consecutive months prior to you moving back to the US on Dec 10th. You can exclude 344/365 x $91.5k of UK income for 2010.
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