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Dear Tax Talk,
I am a U.S. citizen living and working in Bangkok, Thailand, since late July 2008. I also lived in Bangkok between November 2007 and February 2008. Between February 2008 and July 2008, I lived and worked in Washington, D.C.
My question is: Can the income I am making (about $75,000 a year) in Thailand be excluded from U.S. taxes for 2008? If not, am I responsible for U.S. taxes for only November and December 2008?
-- Jason
Dear Jason,
U.S. citizens are taxed on worldwide income regardless of where they reside. The foreign earned income exclusion, or FEIE, allows a U.S. taxpayer to earn up to a certain amount each year and exclude it from his or her income tax return in the U.S.
In 2008, the exclusion is $87,600, and is indexed for inflation so that the 2009 exclusion is $91,400. In order to qualify for the exclusion, the individual has to either be a bona fide resident of the foreign country for a period that includes a full tax year, or be physically present out of the U.S. for a period of 330 days in a 12-month period. These are referred to as the bona fide resident test or physical presence test.
To be a bona fide resident for 2008, you would have had to move to Thailand in November 2007 with no present intention of returning to the U.S. You can have some return presence in the U.S. for the period that you establish bona fide residence in the other country.
In other words, you can return to the U.S. for temporary periods and this will not interrupt your full year in another country for purposes of this test. However, the fact that you returned three months later, in February 2008, and stayed for five months, probably negates the bona fide residence test for 2008.
To qualify for the physical presence test for part of 2008, you will need to be out of the U.S. for a period that covers 12 months, in which you are not in the U.S. for more than 35 days. In your case, if you can make it from July 2008 through July 2009 without being in the U.S. for more than 35 days, you can claim the FEIE for 2008 for that part of the 2008 year that you qualify.
For example, if you returned to Thailand July 1, 2008, and stayed out of the U.S. through June 2009, you would have 183 qualifying days in 2008, or half of the year (there are 366 days in 2008).
You could elect FEIE on up to half of the $87,600 limit, which would be $43,800 in exclusion. Your foreign income includes the income you earned in Thailand in January and February 2008, even though it is not within your qualifying period. A salary of $75,000 a year is equivalent to $6,250 per month. If you did this for eight months, your foreign earned income would be $50,000, but your exclusion cap limits you to $43,800. The remaining $6,200 cannot be excluded and neither can the wages for the time that you worked in D.C.
Your qualifying period will end after the traditional due date for your return, April 15. However, because you reside abroad, you get an automatic two-month extension. If you need additional time, file for an extension on Form 4868.
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