Americans Abroad: Tax Obligations, Tax Relief, and Reporting Requirements - YouTube video text script

Hello and welcome to today's webinar, Americans Abroad: Tax Obligations, Tax Relief, and Reporting Requirements. I see it's the top of the hour. We're glad you've joined us today. My name is Anika Pompey, and I'm a Senior Stakeholder Liaison with the Internal Revenue Service, and I will be your moderator for today's webinar, which is slated for approximately 120 minutes. So before we begin, if there is anyone in the audience that is with the media, please send an email to the address on the slide, and be sure to include your contact information and the news publication you're with. Our media relations and stakeholder liaison staff will assist you and answer any questions you may have. And as a reminder, this webinar will be recorded for future viewing.

And if you're just joining us, I want to quickly mention some virtual webinar housekeeping items. First, closed captioning is available for today's presentation and will be available throughout the webinar. Second, you can download several documents by clicking on the materials dropdown arrow on the left side of your screen. We've included technical help documents along with a copy of today's PowerPoint and other resources. Third, if you've had a topic-specific question for today, please submit it by clicking the ask question dropdown arrow to reveal the text box. Type your question in the text box and click send and, remember, do not send any sensitive or taxpayer-specific information.

Now, during the presentation, we are going to take a few breaks to check in and engage with you guys and, at those times, a polling style feeder will pop up on your screen with a question and multiple choice answers. You'll select the response you believe is correct by clicking on the radio button next to your selection and then click submit. If you do not get the polling question, this may be because you have your popup blocker on. So please take a moment to disable your popup blocker now so that you can answer the question. We've included several technical documents that describe how you can disable popup blockers based on the browser you are using, and we have documents for Chrome, Firefox, Microsoft Edge, and Safari for Macs, and you can access them by clicking on the materials dropdown arrow on the left side of your screen.

Now we're going to take a moment and test the polling feature. So here's your opportunity to ensure that your pop-up blocker is not on so you can receive the polling questions throughout today's presentation. Now, audience, this example polling question will count towards the polling question requirements to earn CE credit. So here's the question: Do you know who your local stakeholder liaison is? Answer A for yes, B for no, or C, what is a stakeholder liaison? You can take a moment and click the radio button that corresponds to your answer, and I'll read that again. Do you know who your local stakeholder liaison is? Answer A for yes, B for no, or C, what is stakeholder liaison? I'm going to give you guys a few more seconds to make your selection. All right, so we are going to stop the polling now, and let's see what the majority of you responded.

All right, guys, it looks like my polling results are taking a little longer than expected. All right. So I see that a majority of you chose letter A. So for those of you who selected B or C, I do encourage you to visit irs.gov and enter stakeholder liaison in the search bar. You should see a link for stakeholder liaison contacts, and that should take you to our page to learn more about our role as collaborative outreach champions and how to reach your local stakeholder liaison. Now we hope that you received the polling question and you were able to submit your answer. If not, now is the time to check that pop-up blocker to make sure you have it turned off.

So now that we've concluded our administrative items, we can move along with our session. So again, welcome and thank you for joining us for today's webinar, Americans Abroad: Tax Obligations, Tax Relief, and Reporting Requirements. This webinar is scheduled for approximately 120 minutes from the top of the hour. And audience, please note that the information contained in this presentation is current as of the date it is presented. It should not be considered official guidance and the material presented is solely for information purposes related to tax administration.

All right, so let us introduce our panel of speakers now. Today we're being joined by Senior Revenue Agents Bethany Cross, Kathy Bishop, Loretta Henry, and Maryann Picinic with the Large Business and International Division. They are all technical specialists in international individual compliance and are responsible for facilitating and coordinating the identification and development of issues on examinations involving US tax residency status and the taxation of US individuals living and/or working outside the United States.

Bethany previously worked numerous examinations as a revenue agent in LB&I International Individual Compliance. Bethany has expertise in a variety of topics including residency status, the Foreign Earned Income Exclusion, taxation of individuals with income from US territories, and employees of foreign government and international organizations. She has developed and presented numerous training courses and workshops, presenting them within the IRS. Bethany has also developed and presented courses on behalf of the IRS to external audiences. Bethany holds a Bachelor of Science in Computer Science, with a minor in accounting and courses in education.

Next, we have Kathy. Kathy's been with the IRS for 16 years. She previously worked in numerous examinations as a revenue agent in the Small Business and Self-Employed Division, including international issues. Kathy has expertise in a variety of topics including residency status, the Foreign Earned Income Exclusion, taxation of individuals with income from US territories, and employees of foreign governments and international organizations. Kathy holds a Bachelor of Science in Accounting with a minor in Computer Technology and a Master of Science in Accounting and Taxation.

Maryann has about 23 years of combined experience with the IRS, private industry, and one of the Big Four firms, with most of her experience concentrated in the international tax area. And Maryann is a current CPA licensed in the State of New York. And last but not least, we have Loretta, and she's been with the IRS for just over a year. And prior to this, she worked at a Big Four firm specializing in international taxation for inbound and outbound individuals and a financial planner for a corporate and investment bank. Loretta is a licensed CPA in the State of New York.

So let's give a virtual welcome to Bethany, Kathy, Loretta, and Maryann. And I'll turn it over to Bethany to kick off the presentation.

Thank you, Anika, and welcome everybody to this afternoon's presentation, or morning depending on what time zone you happen to be in. During today's webinar, we're going to specify the US income tax obligations of US citizens and residents who are living and working outside the United States. We're going to discuss the individual income tax reporting requirements. We're also going to explain the requirements briefly for reporting foreign assets or investments on a Report of Foreign Bank and Financial Accounts, commonly referred to as an FBAR. We're going to list the requirements for claiming the Foreign Earned Income Exclusion, discuss relief that may be available through the Foreign Tax Credit mechanism, and summarize the US employment tax obligations of US citizens and US residents who are living and working outside the United States.

Here on this slide are some acronyms that will be used during this event. So that's -- I'll give you a couple of seconds to look those over. Okay, regardless of where they live, US citizens are required to report and pay all applicable federal taxes on all of their income, both US source income and foreign source income, unless an item of income happens to be specifically exempt from US taxation under a provision in the Internal Revenue Code or under a provision in an applicable income tax treaty.

Also, US citizens and residents may be subject to employment taxes on their earnings overseas, and they must file a Form 1040 with the IRS. US residents living and working abroad are generally taxed in the same way as US citizens. In fact, I got a little mixed up a minute ago, didn't I? I included the residents on some of that. So meaning they too must report and pay applicable federal taxes on all of their income regardless of the source, unless it specifically exempts an item of income under the Internal Revenue Code or under a provision in an income tax treaty that applies. They may be subject, like a US citizen, to self-employment taxes or employment taxes, and they must generally file on a Form 1040. And notice we do say generally because there could be an exception.

Anika, this is a good time, I think, for our first polling question. What do you think?

Yes, it's the perfect time for our first polling question. So audience, here is your first question. US citizens and residents must report and pay applicable US taxes on A, all of their income, both US and foreign source, if living in the US; B, only their US-source income; C, all of their income, both US and foreign source, regardless of where they live; or D, only their foreign source income. Now take a moment and click the radio button that best answers the question or submit your answer in the Ask Question feature. Enter only the letter A, B, C, or D in the Ask Question text box. And as a reminder, the polling question example that we did at the beginning of this presentation will count toward the requirements. So I'm going to give you guys a few more seconds to make your selection.

All right, so we are going to stop the polling now, and let's share the correct answer on the next slide. And the correct response is C, all of their income, both US and foreign source, regardless of where they live. And I see that 62% of you responded correctly. Well done, audience. It looks like the majority of you are following along, so I think we can pass the mic back over to Kathy.

Thank you, Anika. So let's discuss the filing status of US citizens or residents who are married to non-residents. So they may, along with their spouse, file a joint Form 1040 choosing to treat that non-resident spouse as a US resident for tax purposes. So if they don't choose to file a joint return with their non-resident spouse, they are considered unmarried for purposes of filing Form 1040 as head of household. However, that non-resident spouse is not a qualifying person for purposes of the head of household filing status, so they must have another qualifying person and they must meet the other test to be eligible to file as head of household. So if they don't choose to file jointly and they do not qualify as head of household, then their only option is to file Form 1040 using the married filing separate filing status.

So this slide explains a bit more about the joint return election that is available to a US individual who is married to a nonresident of the US. So the first one is the 6013(g) election, and it allows an individual who was not a US resident during the tax year, but was married to a US citizen or resident to, along with their spouse, choose to be treated as a US resident. This is a once-in-a-lifetime election and it applies to all future years unless it is suspended or terminated. So this slide contrasts that election with the one under 6013(h), which allows a non-resident spouse who becomes a US resident by the end of the tax year to be treated as a US resident for that entire year. So both elections are made by attaching a statement to a jointly filed Form 1040. Making either of these elections generally prohibits individuals from claiming benefits under a US income tax treaty as a resident of a treaty country, as that would be inconsistent.

Now, as mentioned earlier, US citizens and residents must file Form 1040, and if you live and work abroad, you're allowed two extra months to file your return and pay any amount due without requesting an extension. Now, while you have to file a form to get -- excuse me, you don't have to file a form to get that two-month extension. You will have to attach a statement to your tax return explaining that you qualified because you live and work abroad. So if you live and work abroad and file a calendar year income tax return, you have until June 15th to pay the tax and file your return, or to submit Form 4868 requesting an additional four-month extension. And if you expect to meet the bona fide residence or the physical presence test but you don't expect to meet either of those tests by the due date of your return, you can request additional time by filing Form 2350. This form allows you to request an extension to a date after you have met the test. Now, Form 2350 must be filed on or before the due date of your return. So please be aware that you'll owe interest on any tax that is not paid by the due date which for calendar year taxpayers is usually April 15th, and the interest runs until you pay the tax. And late payment penalties apply to any tax that is not paid by the two-month extended due date, which for calendar year taxpayers, again, is June 15^th, now this is true regardless of any extensions that may be granted as a result of filing Form 4868 or filing Form 2350.

So in addition to filing an income tax return, you may have information reporting requirements. And one of those is the FinCEN Form 114, which is the Report of Foreign Bank and Financial Accounts, or known as the FBAR. Now this form is due April 15th, but if more time is needed, there is an automatic extension to April -- or excuse me, to October 15th. The Bank Secrecy Act, or BSA, requires yearly filing of an FBAR if you are a citizen or resident of the US with a financial interest in or signature authority over one or more foreign financial accounts, and the aggregate -- excuse me -- aggregate value of the accounts exceeds $10,000 US at any time during that calendar year.

So if the account is jointly held, each person must report the entire value of the account on the FBAR. So the term foreign financial account includes bank accounts, securities accounts such as brokerage accounts, commodity futures or option accounts, insurance or annuity policies with a cash value, mutual funds or similar pooled funds, and any other accounts that are maintained in a foreign financial institution or with a person engaged in the business of banking. So it does not include stocks, bonds, or similar financial instruments held directly by you, real estate or an account holding solely real estate, precious metals or gems held directly by you, or the contents of a safety deposit box. And the FBAR must be filed electronically now, and a link to the FinCEN BSA e-filing system will be provided on the resources slide at the end of this presentation.

So another common reporting requirement is the Form 8938, which is the Statement of Specified Foreign Financial Assets. You must file this form if you have an interest in specified foreign financial assets and the value of those assets is more than the applicable reporting threshold and those thresholds are $200,000 on the last day of the tax year or $300,000 if married filing separate, or if at any time during the tax year that amount is $400,000, and $600,000 if married filing joint.

You must also file Form 8938 if 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 reported, included, or otherwise reflected on your income tax return. And now other possible information reporting requirements include Form 3520, which is the annual return to report transactions with foreign trusts, and Receipt of Certain Foreign Gifts, Form 5471, Information Return of US Persons with Respect to Certain Foreign Corporations, and Form 8865, the Return of US Persons with Respect to Certain Foreign Partnerships.

Now that we have talked about filing requirements, I'll turn the mic back over to Bethany to introduce some provisions that may provide relief from double taxation. Bethany?

Thank you, Kathy. Double taxation may occur when an individual is taxable on an item of income by both the United States and another country. There are three different mechanisms that may provide relief from such double taxation. The Foreign Earned Income Exclusion is one of those, and we're going to talk about that today. The Foreign Tax Credit is another possibility; that too will be covered today. And another possibility is the terms of an income tax treaty if there is one that applies. Treaties are going to be beyond the scope, so our focus today is just on two of these, the Foreign Earned Income Exclusion and the Foreign Tax Credit.

Okay, as a US citizen or resident, you are taxed on your worldwide income. However, if you live and work abroad, you may qualify to exclude income you earned for services that you performed in a foreign country. I want to point out that the Foreign Earned Income Exclusion is only available to US citizens and residents who meet the requirements. It's not available to individuals who are neither US citizens nor residents, and that kind of would be obvious, right?

If you're not a US citizen or resident, that's probably most of the world, and they're living and working wherever they live and work, and we wouldn't have any reason for them to need an exclusion. The Foreign Earned Income Exclusion gets claimed on IRS Form 2555. The maximum Foreign Earned Income Exclusion amount gets indexed annually for inflation. For 2025, it was $130,000. For this current year of 2026, it will be $132,900. In addition to the Foreign Earned Income Exclusion, you may also be able to exclude or deduct 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, the deduction applies to self-employed income, you must meet four specific requirements. First of all, you must have foreign earned income; secondly, your tax home must be in a foreign country; third, you must meet either the bona fide residence or the physical presence test; and you must make a valid election to exclude. So let's discuss these further one at a time. And the first one we're going to talk about is the requirement that you have foreign earned income, which is income that you received for services you performed in a foreign country. Income earned in a US territory is not foreign earned income.

Antarctica is not a foreign country, neither are international waters or international airspace, so income earned in international waters or airspace is not foreign earned income. Neither are wages that are paid by the United States or any of its agencies to a US government employee or to a member of the US Armed Forces. That is not, for purposes of the foreign earned income exclusion, considered foreign earned income even if the services that gave rise to the income were performed in a foreign country. And I want to be clear that two things have to happen. The United States government or one of its agencies is the payer, and the person who's receiving the money is a US government employee, so in that case, it is not foreign earned income.

Okay, Anika, this looks like a good time for our second polling question for people who are taking this course for Continuing Education purposes. 

I agree. So audience, I hope you're ready. Here is your second polling question. Which of the following is not foreign earned income? Is the correct response A, wages paid by the US government to a US government employee working in a foreign country; B, income earned in international airspace; C, income earned in a US territory; or D, all of the above. So your response is time-stamped, so click the radio button that you believe best answers the question. If the pop-up doesn't appear, enter the letter A, B, C, or D in the Ask Question text box and I'll give you guys a few more seconds to make your selections.

All right, so we're going to stop the polling now, and let's share the correct answer on the next slide. And the correct answer is D, all of the above. Now, guys, that response rate was 96% correct. That is awesome, so nice job to you all. We are on a roll here, so Bethany, it looks like I'm going to get -- turn it back over to you to discuss foreign tax home next.

You're right, Anika, thank you. So as I said a few moments ago, there are these four basic requirements that have to be met to qualify for the Foreign Earned Income Exclusion and when I say that, I also am referring right now to the foreign housing exclusion and the foreign housing deduction. So to claim that, you have to have a foreign tax home. We talked about foreign income, now we're talking about the foreign tax home. Your tax home is the general area of your main place of business, employment, or post of duty; in other words, the place where you are permanently or indefinitely engaged to work, either as an employee or as a self-employed individual. And the tax home is not the same as your residence or your domicile for tax purposes. Those could possibly be different.

The tax home is driven, again, by where you work. So if you don't have a regular or main place of business because of the nature of your work, then your tax home could be the place where you regularly live. And if you have neither a regular or a main place of business nor a place where you regularly live, then you're considered an itinerant and your tax home is wherever you work. And so that would probably be somebody who goes around the world as a news correspondent and never spends more than a night or two anywhere, perhaps, at least for a few years of their life. I don't know that anyone would want to do that forever, but some might. But in any event, someone with a job like that would be considered an itinerant, and so their tax home is constantly changing, it's wherever they happen to be working at the moment.

You are not considered to have -- so there's two prongs to this tax home test. The first prong is where do you work? That we just talked about, right? Then there is a second prong, and that has to do with the concept of abode. And that's because the Internal Revenue Code states that you don't have a regular or main place of business -- I mean, sorry, you don't have a tax home in a foreign country for any period during which your abode, meaning the place where your ties are the strongest, is in the United States, unless for tax years beginning after December 31st, 2017, which was quite a while ago, so pretty much everybody nowadays unless you're filing a really delinquent return.

If you're serving in support of the Armed Forces of the United States in an area that's designated by executive order as a combat zone, then you are exempt from that second prong. Those people don't have to meet the abode requirement, meaning the requirement that their ties to the US have to be stronger than to the foreign country. Abode is a very subjective term, and it is the courts that have defined that as where an individual's economic, family, and personal ties are the strongest.

Okay, so again, to have a tax home in a foreign country, it's got to be your primary place of work or business, and you cannot have stronger economic, familial, and personal ties to the United States than to the foreign country. In other words, your abode cannot be in the United States. Okay, that doesn't mean that you can't own a residence in the US. There are people that do have a house here, sometimes they've got it rented out and they are also renting an apartment overseas and living there for a number of years, that's okay. So when we say abode, we mean where are your ties -- personal, familial, and economic ties are the strongest.

Okay, so we've talked about the first two requirements for claiming the Foreign Earned Income Exclusion, the fact that you have to have foreign earned income and that your tax home must be in a foreign country. There are two other requirements. One of those is that you must meet either the bona fide residence or the physical presence test, which we'll talk about in a few minutes, and the other is that you must make a valid election to exclude your foreign earned income. So as I said, there's two tests, you have to meet one of these two tests, bona fide residence or physical presence, and we're going to talk now about the bona fide residence test.

You meet the bona fide residence test if you are a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year, except for brief temporary absences, such as a week or two to attend a friend's wedding or visit the family for the holidays, that kind of thing. Now you'll notice, and it drives me nuts to say that, right, you meet the bona fide residence test if you're a bona fide resident. I mean, that's kind of circular. So I will be elaborating in a couple of minutes. You don't automatically acquire bona fide resident status by just going to a foreign country or countries and staying and living and working there for a year. If you're going there to a foreign country to work on a particular job for a specific period, you ordinarily will not be regarded as a bona fide resident in that country even though you work there for a tax year or longer.

So if someone, my employer sends me overseas, assuming I wasn't a government employee because I wouldn't be able to take it anyway if they did, right, but assuming I'm not a government employee, if I had an employer who sent me overseas for a 15-month, very specific, you're going there for 15 months and then you're coming back, that wouldn't be enough for me to rise to the level of a bona fide resident, okay.

But the length of your stay and the nature of your job are only two of the factors that get considered in determining whether you meet the bona fide residence test. So let's talk about that test. It's a subjective test. In determining bona fide residency, the courts analyze 11 factors, and these factors were first set forth in a very old court case, a 1962 court case, Djuric v. Commissioner.

And while there are 11 factors, you could kind of group them loosely under three basic headings, I guess: the individual's intent, the extent of their assimilation into the life and society of the foreign country, and reasons for temporary absences but there's actually 11 of them, but I'm just kind of abbreviating it there under those headings. Now, the Djuric case actually had to do with bona fide residency in a US territory. And those rules have since changed, so that case is obsolete for purposes of the US territory now, because the code changed on that, on residency in a territory. But nevertheless, when it comes to Code Section 911, the Foreign Earned Income Exclusion, the courts look to those 11 Djuric factors to this day in determining whether an individual is a bona fide resident of a foreign country for purposes of the Foreign Earned Income Exclusion.

Okay, now let's talk about the physical presence test. This one is an objective test and it's determined by counting the number of full days that you are physically present in a foreign country. A full day is from midnight to midnight local time there in that country. To meet the physical presence test, you must be physically present in a foreign country or countries for any reason for at least 330 full days during any period of 12 consecutive months beginning or ending during the tax year. So if I'm living and working in one country and I cross the border to vacation for several weeks in a neighboring country and come back, all of that counts, okay, so that's why we say for any reason. Some of those days you might just be on vacation and some of them you might be in a different country, but the crux of the matter is having 330 full days of presence in a foreign country or different foreign countries, 330 full days in a period of 12 consecutive months.

And on each of those 330 days of presence in the foreign country or countries, you needed to have had a foreign tax home on those days as well, not for the entire 12 consecutive month period, but for those 330 days. And there can be breaks in the 330 days, so I could spend, you know, what's half of 330, 115 -- I could spend 115 days in a foreign country, go back to the US for, let's say, 20 days, and come back for another 115. Well, 115 plus 115 plus the 20 in the US is 350, which is, you know, can easily fit into a 12-month, 12 consecutive month period, which would be 365 days. So that's the rule, is 330 out of 365 days – 300 out of 365 consecutive days. Even though the 330 themselves don't have to be consecutive, the 12 consecutive month period you're looking at, the 365 days, would be. And if there's a leap year, that 12 consecutive month period might actually have 366 days in it. The 12 consecutive month period that you choose, period or periods that you choose, can begin on any day, so it isn't necessarily a calendar year, and there could be more than one 12-month period involved, and they can even overlap, and I do understand that the 2555 unfortunately only has one blank, right, it has a start and an end date at the top of that section.

And so if you're in that situation, you may want to attach a statement. Some people I've heard of have actually -- I'm not going to necessarily recommend it, but they've done two separate 2555s, one for each of the periods that they're looking at. So again, as long as you qualify, and if you're digging in that deep that you're doing your own return, or if you're a tax professional, then please look at those regulations that relate to code section 911 and just make sure that all the criteria there are met. So there can be more than one 12-month period involved and they can even overlap. And there is a very basic example in Publication 54. They don't put it in there every year, so you might have to go back to an earlier version. I didn't see it in the latest version. Sometimes it's in there, sometimes it's not. Pub 54, Tax Guide for US Citizens and Residents Abroad, will have some further information.

Okay, now speaking of these two tests, both of which have to do with being in a foreign country, the minimum time requirements -- remember for the bona fide residency I was saying it has to start with an uninterrupted calendar year with only brief temporary absences like a week or two here or there, that's it. What if you're in a foreign country and a civil war breaks out in that country and you had to leave or something like that? Well, the IRS does publish a list of countries, so each year we publish a list of countries in an Internal Revenue Bulletin with the applicable departure dates, so it's very, very specific.

A person can't say, I was in a foreign country and I got sick, I couldn't complete the time requirement either for bona fide residency or to meet that 330 full midnight to midnight day under the physical presence test. If they say that, it has to be one of those countries listed in that Internal Revenue Bulletin. And here, as you can see on the slide, is the list of countries and dates, very specific, right, for 2025. So a person would have had to have left the foreign country on or after -- they'd have to be there on or before that date.

They'd have had to have gotten there before that date and then left, okay, and it's another requirement is for the individual to show that they did have a tax home in that foreign country. And as we talked about, that's a fairly high standard, stronger ties there than to the United States. Dates, right, and that on or before the beginning date of that waiver, they reasonably could have been expected to meet those minimum time requirements except for the adverse condition that arose.

Okay, the fourth and final requirement for claiming the Foreign Earned Income Exclusion is that you must have made a valid election. The election to exclude foreign earned income and the election to exclude the cost of foreign housing are separate elections, and you make one or both of those by attaching Form 2555 to your tax return for the first year for which it is effective. So let's say that I was living in a foreign country and I was claiming the foreign earned income exclusion, so the first year I claim it, that's the year that my election goes into effect. Let's say that in the second year I'm renting a more expensive apartment and it behooves me to also take the foreign housing exclusion. Then on that second year when I add that foreign housing exclusion on there, that is the election year for that piece, whereas the prior year would have been my election year for the regular, you know, the exclusion.

And then in the second year that I was there, I decided I wanted to do both, so I added on the -- foreign housing exclusion, then that second year would be my election year for that. Once you choose to exclude your foreign-earned income that choice remains in effect for that year and all later years unless you revoke it. Please keep in mind that once you choose to exclude foreign-earned income, you cannot take a foreign tax credit or deduction for taxes on income you can exclude. Now, that doesn't mean you literally can't, but if you do, you are revoking, that's a deemed revocation of your election to exclude.

So you can switch, but when you do, you want to think about it because it precludes you from taking the Foreign Earned Income Exclusion for the next five calendar years, okay. You're not allowed to claim it for the next five tax years, I should say. Okay, so your initial choice of the exclusions on Form 2555, generally must be made with a timely filed return, including any extensions, a return amending a timely filed return, or a late filed return that is filed within one year of the original due date of the tax return, determined without regard to any extensions.

Anika, if it's all right with you, maybe we'll stop here for our third polling question.

Yes, I think it is the perfect time for our third polling question. So, audience, here is your question. Which of the following requirements must be met in order to qualify for the Foreign Earned Income Exclusion? Answer A, for foreign earned income; B, for meet the bona fide residence or physical presence test; C, valid election; D, contact home; or E, all of the above. So click the radio button that best answers the question, or enter only the letter A, B, C, D, or E in the Ask Question text box. Remember, your response is being time-stamped. I'm going to give you guys a few more seconds to make your selection.

All right, so we are going to stop the polling now, and let's share the correct answer on the next slide. And the correct answer is E, all of the above. All right, so I see that 96% of you responded correctly to that question as well. You guys are on a streak, so terrific job, guys. Bethany, can you tell us about the filing requirements?

I sure can. Thank you. Okay, you must file a tax return attaching Form 2555 to claim the Foreign Earned Income Exclusion and/or the Foreign Housing Exclusion or Deduction following the instructions for Form 1040 and completing -- and this is important -- completing the Foreign Earned Income Tax Worksheet, because that's where you have to go to figure the tax on the income that's not excluded. That worksheet is in the instructions to the Form 1040, but that is a key component of how to properly file this. Also, I want to point out that even if your foreign earnings are below the Foreign Earned Income Exclusion threshold, you still must file a US income tax return.

Okay, I am going to now turn this over to you, Loretta.

Thanks, Bethany. So good afternoon, everyone. Now we're going to switch gears and move on to our next topic, which is the Foreign Tax Credit. Now, as Bethany had explained earlier, one of the mechanisms available to taxpayers is the Foreign Tax Credit, or what we commonly refer to as the FTC. So this slide shows what can be considered the tripod of Foreign Tax Credit concepts: worldwide taxable income, double taxation, and the FTC limitation. So first we have worldwide taxable income, which has already been explained as the most defining characteristic of our US tax policy. Next is double taxation. While you can find relief from double taxation by claiming the Foreign Earned Income Exclusion, another option is the Foreign Tax Credit, which allows a reduction of tax dollar for dollar.

So this credit's quite valuable as compared to a deduction that only reduces the tax at the marginal tax rate. The Foreign Tax Credit allows a reduction of US tax on foreign source income by all or part of the qualified foreign income taxes paid or accrued during the year. So the key takeaway here is the Foreign Tax Credit does not reduce US tax on US income, which brings us to the next point, which is the Foreign Tax Credit limitation. The full amount of foreign income taxes paid or accrued will not necessarily be the amount of your Foreign Tax Credit for that year. The Foreign Tax Credit can only be claimed for qualified foreign taxes paid or accrued on foreign source income.

And next, we have the annual election. So taxpayers can make an annual election to either claim the credit or they can choose to deduct the foreign taxes. They may claim a credit in one year and a deduction in the other, or vice versa. They just can't do both on the same foreign taxes in the same year. So let's say, Taxpayer chooses to claim a deduction for foreign income taxes. They must itemize deductions to get the tax benefit.

The tax deduction reduces the amount of income subject to tax, while a credit reduces the amount of tax. Attaching a completed Form 1116 to a timely filed original US tax return constitutes an election to claim the Foreign Tax Credit and once an election is made to either claim a credit or deduction, all foreign taxes must be treated the same for that particular tax year. In other words, if a taxpayer chooses to take a credit for qualified foreign taxes, they must take the credit for all foreign taxes paid or accrued in that year.

Taxpayers cannot claim a credit for some foreign taxes and a deduction for others. And there is a de minimis exception for filing the Form 1116, but all four of the following conditions must be met: all of the foreign source income is passive, for example, on interest or dividends; the foreign income tax is withheld at source; all foreign passive income was reported on qualified payee statements, such as a 1099-DIV or 1099-INT; and the fourth is the foreign tax withheld is not more than $600 for married filing jointly or $300 for all other filing statuses. If all of those four requirements are met, the taxpayer can elect to report the Foreign Tax Credit directly on Form 1040, Schedule 3, Line 1.

Now we're going to go over eligibility. The most common taxpayers claiming the Foreign Tax Credit are US citizens and residents. Both are sometimes referred to collectively as US persons. So this also includes any eligible taxpayer who's a member of a partnership, a shareholder of an S corp, or a beneficiary of an estate or trust. Generally, non-residents cannot claim the Foreign Tax Credit because they're not taxed by the US on their foreign source income.

And I think we're ready for our next polling question, Anika.

Yes, it is time for our next polling question. So audience, we are just about at the halfway mark for today's presentation. I hope you guys are still with us. So here's your fourth polling question. Which statement below is false? Answer A, for the purpose of the credit is to eliminate double taxation of income; answer B, for property taxes may be creditable under some circumstances; answer C, for some foreign countries do not have an income tax; or answer D for married filing joint taxpayers can claim Foreign Tax Credit directly on Form 1040 when not more than $600 is subject to other requirements.

Okay, so I'm going to give you guys a minute to review that question again, and then I want you to click the radio button that you believe most closely answers this question, or you can enter the letter A, A, B, C, or D in the Ask Question text box. And remember, your response is times-tamped. I'll give you guys a few more seconds to make that selection.

Okay, we are going to stop the polling now, and let's share the correct answer on the next slide. And the correct response is B, property taxes may be creditable under some circumstances. Okay, so it looks like this time we only had a 49% correct response rate. So maybe we need a little clarification. Loretta, can you provide us with a little more detail?

Sure. I'm going to go over the -- what taxes actually qualify and the four tests that are required in order for them to be credible foreign taxes. And the first is if tax is considered paid or accrued only by the person on whom the foreign law imposes the legal liability for such tax, even if someone else remits it. A straightforward example would be a tax that's withheld from a taxpayer's wages, it's considered imposed on that taxpayer and not the employer.

Similarly, withheld amounts on investment income by a payer via withholding agent are considered imposed on the taxpayer and not the withholding agent. Second, the foreign tax must be paid or accrued to a foreign country. Most individuals are on a cash method and will by default take foreign taxes into account when they're paid. This includes foreign taxes that relate to a different tax year, such as prepayments of a foreign tax through withholding or estimated tax payments, as long as the withholding or estimated tax is a reasonable approximation of the taxpayer's actual liability. And the third requirement is the foreign tax must be an income tax or a tax in lieu of an income tax.

So this does not include any foreign levies, such as gasoline taxes penalties, fines, foreign real estate taxes, inheritance taxes, certain Social Security taxes paid or accrued, or value-added taxes, which are referred to as VAT taxes, because those are not income taxes and they don't qualify for the Foreign Tax Credit. And finally, the last requirement is the income tax must be compulsory, meaning only the legal and actual amount of their tax liability and that's one area we do see a lot of noncompliance.

The amount of foreign tax that qualifies is not necessarily the amount of tax withheld. So I'm going to expand on this requirement. And this brings us to the tax treaties and the Foreign Tax Credit versus the statutory rates and the treaty rates. So the US has tax treaties with many countries. Under terms of these tax treaties, Residents or citizens of the US are taxed at a reduced rate or even sometimes exempt from foreign taxes altogether on certain types of income they receive, and portfolio income is one of these common items.

To pay only the legal amount of tax, an eligible taxpayer must invoke the treaty and provide a statement to the withholding agent requesting the lower treaty rate. If they do not, a statutory withholding rate which is usually almost always higher, is applied by the withholding agent. Now that excess tax withheld is not deemed compulsory and fails the previously listed fourth requirement. If a lower treaty rate exists, taxpayers are only allowed to claim the lower treaty rate. If they want the 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 tax treaty exists between the US and the foreign country.

If it does, then you want to determine if a lower treaty rate is applicable to the type of income, and the IRS.gov website houses all of the latest tax treaties with the foreign countries. So you can access them by going on to IRS.gov, typing in on the search box tax treaties, and you'll find all the most recent tax treaties with foreign countries. There's also an IRS publication, which is Pub 901, Tax Treaties, where you can also find information on the treaty rates as well as the treaty countries.

And I think, Anika, this brings us to the next polling question.

You are absolutely correct. So, audience, here is our fifth polling question. Taxpayer A earned $1,000 of passive income in Country X and had $150 withheld. Country X tax treaty stipulates a 10% withholding rate on passive income. What is the maximum amount of Country X tax taxpayer A can claim for foreign tax credit purposes? Answer A for $100, B for $200, C for $300, or D, the actual amount withheld by Country X. Now you guys, you know what you need to do here, so go ahead and make your selection by clicking the radio button that you believe most closely answers this question, or you can enter only the letter A, B, A, B, C, or D in the Ask Question text box. Your response is time-stamped. I'm going to give you guys a few more seconds to make your selection.

All right, so we're going to stop the polling now, and we'll share the correct answer on the next slide. And the correct response is A, $100. I see that 62% of you responded correctly, so great job, audience. Maryann, I'm going to turn it back to you.

Okay, thank you, Anika. So we have on this slide, we're showing the seven categories of income, and the code states the Foreign Tax Credit limitation must be calculated separately for each category of income. The foreign income and related taxes from one category cannot be combined with another category. Keeping it short and sweet, here we have 951 A, which is Global Intangible Low-Taxed Income, also known as GILTI, foreign branch, which is which are the business profits of a US person attributable to foreign qualified business units, or QBUs; passive, which includes what you'd expect, dividends, interest, rent, royalties, annuities, etc.; then we have general, which is income from sources outside of the US that does not fall into one of the other separate LIBIC categories, just previously described, and it generally includes active business income and compensation of an individual as an employee, such as wages.

Then we have 901J, which is income earned from activities conducted in sanctioned countries, and for a list of these countries, you can refer to Publication 514. And it's a good idea to refer to Pub. 514-2 because countries over time do change with some going off the list and some being added to the list.

Next, we have certain income resourced by treaty. If a sourcing rule in an income tax -- in an income tax treaty treats US source income as foreign source and you elect to apply the treaty, the income will be treated as foreign source. So just be careful and be aware that resource by treaty is not the same as certain income affected by reduced treaty rates, which we discussed, and stays in the passive category. And finally, we have the lump sum category, and this applies to any income a taxpayer receives from a foreign source lump sum distribution retirement plan, and the taxpayer figures the tax on it using a special averaging treatment.

Now, a separate Form 1116 must be completed and attached for each category. The FTC must be calculated separately for each category of income, and the Form 1116 with the largest FTC needs to have the summary section completed, and the summary section is on page two of the form.

So on our next slide, we're actually back on our FTC overview, and the third bullet mentions the FTC limitation. This law was created to prevent foreign income taxes from reducing US income taxes on US-sourced income. So stated another way, the tax policy is to provide relief only in instances where double taxation exists, the US taxes on foreign-sourced taxable income. So for example, if a taxpayer paid $100 of foreign taxes on some foreign income, but the US tax on that foreign income was only $90, we would only allow the $90. The computation of the maximum allowed FTC is expressed as a formula you see here on this slide. So, if a person pays more tax to the foreign country on the foreign source income than is due to US on the same foreign source income, then based on the limitation formula, the US will limit the amount that can be credited. The first bullet here talks about how the FTC is limited, and the allowable credit is limited and is the lesser of the amount paid or accrued, or the overall limitation on the foreign tax credit. The second bullet expresses this limitation as a formula; foreign source taxable income, SSTI, divided by worldwide income times US tax on the pre-credit basis.

Now, on our next slide, often the FTC and the Foreign Earned Income Exclusion are intertwined, and many people abroad have foreign earned income in excess of the exclusion. You may also have unearned income, which is not eligible for the exclusion. Both the Foreign Earned Income Exclusion and the FTC are two tax advantages but differ at their very core as to the type of income they are being applied to. The objective of the FEIE aims to exclude all or some of your foreign earned income from US tax. It's almost like you had not earned it at all. Alternatively, The FTC reduces your US income tax liability.

The FEIE is more particular about your legal residence abroad than the FTC. To claim the FEIE, you must pass either the bona fide residence test or the physical presence test, which was discussed previously. The FTC is less stringent, and you can apply the Foreign Tax Credit no matter where you live or how long you, you stay there. Both the FTC and the FEIE can produce major tax savings, but they cannot be applied to the same dollar of income. Generally, the Foreign Earned Income Exclusion is ideal if the tax rate the host country is lower than that of the US. Meanwhile, you might benefit more from the FTC if the tax rate in a host country is higher than that of the, of the US.

Okay, next slide. Now, you cannot get relief on income that is not subject to double taxation or income that is not even taxed. Think of this in another way. The 1040 is the worldwide amount, and the Form 1116 is the foreign portion of that worldwide amount. Since the 1040 had worldwide taxable income reduced by the Foreign Earned Income Exclusion, Form 1116's gross wages must also be reduced by that excluded amount. When we think about adjustments to income, we also need to adjust the tax on that excluded income.

So a simple example, assuming nothing else, you have a 2022 Form 2555 with foreign gross wages of $500,000 and the taxpayer took the Foreign Earned Income Exclusion amounting to $112,000. Assuming nothing else on the return, that leaves only $388,000 to be taxed on the Form 1040 as worldwide taxable income. Similarly, Form 1116, Line 1 must also have gross foreign source income reduced. So, only the net is eligible for the FTC because $112,000 was never taxed on the Form 1040.

So you may be wondering, well, what happens to the foreign taxes that were paid on that Foreign Earned Income Exclusion of $112,000? Just as Foreign Source Gross Income on Line 1a must be adjusted by reducing the amount by the FEIE, the related foreign taxes allocable to the excluded income also needs to be reduced. The foreign taxes paid on the foreign gross wages was $100,000, so you take the ratio of the Foreign Earned Income Exclusion of $112,000 divided by the $500,000 of foreign gross wages, which gives you a 22.4% rate, multiplied by the foreign taxes, which results in $22,400. This amount is the reduction for foreign taxes allocable to the excluded income, and it will be shown as an adjustment and a reduction to the foreign taxes on Part III, Line 12 of the Form 1116.

Now if we go to the next slide. Okay, so now let's talk about timing of the credit. A cash method taxpayer can elect to claim a foreign tax credit on either the cash basis, also known as the paid method, or the accrual basis by checking the appropriate box in Part II of Form 1116. You elect the Foreign Tax Credit simply by attaching the Form 1116 to your return. If the Cash or Accrual box is blank, then the IRS assumes you have chosen the paid method. Be aware that an individual can elect the accrual method; however, once made, it is binding on all future years.

Now I'd like to talk about amended returns, and the general rule is a taxpayer cannot switch to the accrual method on an amended return. But we do want to point out that effective for tax years beginning after December 28, 2022, a new 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 an accrual basis is made, that is, the election year is the first year for which the taxpayer has ever claimed the FTC, the election to claim the FTC on accrual basis may be made on an amended return. And this is per Treasury Regulation 1.905-1(e)(2). And the election is binding in the election year and all subsequent taxable years in which the taxpayer claims a foreign tax credit.

And here is why this was carved out, and it's a very simple example. Let's say it's 2023, year one, and a US resident taxpayer has foreign source income. The taxpayer paid foreign taxes but never claimed the Foreign Tax Credit in prior returns and did not claim the Foreign Tax Credit on the timely filed original return. Now we're in 2024, year two, the taxpayer learns that claiming the FTC on the accrual method would benefit them greatly, and they can amend their 2023 year one return and claim the FTC on the accrual method. Why is this election permitted? Well, because the taxpayer did not claim the FTC in any prior year returns, nor did they claim it on a timely filed original 2023 return. Therefore, the taxpayer has not chosen or elected a method for purposes of the Foreign Tax Credit. This means the election made on the amended return is the first time the taxpayer has chosen a method to claim the FTC, and so it's allowed.

Now on to the next slide. Now we said taxpayers sometimes cannot claim all the taxes in a particular category as an FTC because they exceed the Foreign Tax Credit limitation. When foreign taxes paid are greater than the limitation, this puts the taxpayer in what's known as the excess credit position, and this excess must be first carried back to the first preceding year. So let me just reiterate that. The excess must first be carried back to the first preceding tax year and then forward to each of the 10 succeeding years. There is one exception, and that applies to Section 951A income, otherwise known as Global Intangible Low-Taxed Income, or GILTI, which cannot carry under the law. Form 1116 and related instructions will instruct the reader to leave the carryover and carryback line in the GILTI category of the Form 1116, Part 3, Line 10 blank. This GILTI category is the only category that cannot have a carryback or carryover.

In the second bullet, we have what is called an excess limitation, which is where a limitation exceeds the qualified taxes paid. A couple of observations. So first, you cannot take the Foreign Tax Credit if you have no foreign source income, and that's because if there is no foreign source income, this makes the numerator in the limitation zero, and the FTC is the lesser of the limitation in this case zero, or the foreign taxes paid. Secondly, if you never have any foreign-sourced income in future years, you will lose the ability to utilize that carryover. And finally, when you carry back or carry over excess credits, there must be excess limitation in that year to absorb the carry. So if there's no excess limitation, you will not be able to carry excess credits to that year.

Now over to Kathy. Kathy?

Thanks, Maryann. So now we're going to switch gears again from Foreign Tax Credit, and we're going to talk about employment taxes. So Social Security and Medicare taxes are payable on the wages of US citizens and residents who are working abroad for an American employer. So the term American employer is defined in IRC Code Section 3121(h) as a corporation organized under US federal or state law, an individual who is a resident of the United States, a partnership if two-thirds of those partners are US residents, a trust if all the trustees are US residents, or if the US government -- sorry, if it is under the US government or its instrumentalities.

Now, FICA taxes are payable on those wages if US citizens and residents are working abroad for a full foreign person treated as an American employer under IRC Code Section 3121(z), or in certain instances where the foreign affiliate of an American employer, meaning a foreign entity in which a US company has a 10% or greater interest, if the American employer agreed, and that's under Code Section 3121(l). So if they agreed with the IRS to remit employment taxes on behalf of the US citizens and residents employed by the foreign affiliate. And self-employment to US citizens and residents, they are responsible for paying self-employment tax under the Internal Revenue Code if their net earnings from self-employment is equal to or if it exceeds $400, and that's regardless of where the self-employment activities occurred or where the individual resides during the period of self-employment and whether the individual is claiming the foreign earned income exclusion.

Now I think it's time for another polling question, Anika.

Yep, that's right. So audience, this is our sixth polling question, and this one is actually true or false. So here's the statement. Self-employed US citizens and residents who live and work abroad must report and pay self-employment tax if they have net earnings from self-employment of at least $400. Answer A for true or B for false, they do not have to pay self-employment tax. Go ahead and make your selection, click the radio button for your answer or enter only the letter A or B in the Ask Question text box. And remember, your response is time-stamped. So I will give you guys a few more seconds to make your selection.

All right, so we're going to stop the polling now, and we'll share the correct answer on the next slide. And the correct answer is A, true. And I see that 95% of you responded correctly, so that is another great correct response rate. Kathy, I think you're going to explain total totalization agreements, is that correct? 

That is correct, thank you. So, now what if you live and you work in a foreign country and you're paying into their Social Security system? So some foreign countries have entered into what are called totalization agreements with the US to prevent the payment of Social Security taxes to two different jurisdictions on the same wage or self-employment income. Now, we'll provide a link on a resources slide at the end of this presentation that will include more information about totalization agreements, and it will include a list of those countries.

So if you are subject to a totalization agreement, then the terms of that agreement will govern whether Social Security taxes must be paid in the United States. Where a totalization agreement is in place, tax is not owed to the United States if the terms of that agreement provide that the wages or net earnings from self-employment are subject only to foreign Social Security taxes and are exempt from the US Social Security tax. That is under Internal Revenue Code Sections 3101(c), 3111(c), and 1401(c).

So how do you go about claiming that exemption from Social Security taxation in the US under a totalization agreement? So if you're an employee, either you or your employer will request a -- excuse me -- will request a certificate of coverage or a similar statement from the authorized official or agency of the foreign country that will verify that the wages are subject to Social Security in that country. So if the authorities of the foreign country won't issue a statement, then either you or your employer should get a statement from the US Social Security Administration saying that the wages are not covered by US Social Security.

Now either way, your employer should keep a copy of the certificate or the statement in their files. Okay, now what if you're self-employed? So in that case, you would be the one that needs to request a certificate of coverage or similar statement from the appropriate agency of the foreign country. So if you can't get a statement or a certificate from the foreign country, then you would need to ask the US Social Security Administration for a statement. Then you would attach the certificate or the statement to your tax return for each applicable year and print Exempt See Attached Statement on the line on the tax return for self-employment tax, and this is line 4 of Schedule 2 of the Form 1040.

Okay, Anika, do you have one more polling question for everyone?

I absolutely do. So audience, this is our last polling question. Under the terms of a totalization agreement, a US citizen or resident may not have to pay what type of tax? Is it A, employment taxes; B, self-employment taxes; C, US income tax; D, both A and B; or E, all of the above. Now, by now you guys know how this works, so go ahead and make your selection by clicking the radio button you believe most closely answers this question, or enter only the letter A, B, C, D, or E in the Ask Question text box. And remember, your response is being time-stamped. So I'll give you a few more seconds to make your selection, and we'll get the correct answer on the next slide.

And the correct answer is both A and B. So let's see. Okay, so it looks like only 56% of you responded correctly for that one. So Kathy, can you help us with that one? Can you clarify that polling question, that response for us, please?

Sure, Anika. So those, The totalization agreements that we discussed, they only pertain to employment taxes and self-employment taxes, because those, for some employers, they may have, or some foreign countries, they may have their own type of Social Security that you might pay into, and we don't want you to pay into both, so the totalization agreements would only pertain to employment taxes and self-employment taxes; it does not include US income taxes, so hopefully that clarifies that a little bit.

So our next topic, we're going to talk a little bit about tax credits. So individuals who claim the Foreign Earned Income Exclusion, the Foreign Housing Exclusion, or the foreign housing deduction, those individuals cannot claim the Earned Income Credit, the Additional Child Tax Credit, nor can they claim a Foreign Tax Credit on the excluded income. So now on this slide, here are some resources that you might find helpful. There are quite a few publications. That include very good information for the issues that we've been talking about today. And additional links that you might find helpful are found here. There's a link to pages for individual taxpayers with international aspects to their return. There's more information on totalization agreements and a link to tax treaties -- excuse me, tax treaties. I'm tongue-tied today and a link to pages for SBAR, the electronic filing that we talked about earlier. So since it does have to be filed electronically, here is the link so that you can do that.

Now on the next slide here, there's additional resources. There's the taxpayer assistance line for both inside and outside the United States. So there are a number of practice units about topics that we discussed today, and we also have some on foreign earned income exclusion, the foreign tax credit, and employment and self-employment taxes for US individuals working abroad. And you can find all of the IRS practice units on these and other topics that you may have interest in at the web address shown on this slide.

And lastly, the IRS now offers free live text chat support to individuals outside the United States who have questions about the status of an amended return or that might need a tax transcript. So this new service is available Monday through Friday from 6:00 AM to 11:00 PM Eastern Time and the link is listed here on this slide. So for account-specific questions, you'll need to use the ID.me to verify your identity. And then for help beyond what is offered via international text chat, you can go to the web address listed in the second bullet of this slide.

So this concludes the presentation portion of today's webinar. And now I'll turn the mic over to Anika for the question and answer session.

Thank you so much, Kathy, and amazing job by our presenters. Wouldn't you say so, audience? Now it's me again, Anika, and as Kathy mentioned, I will be moderating the Q&A session. So before we start, I do want to thank everyone for attending and staying engaged during today's presentation, Americans Abroad: Tax Obligations, Tax Relief, and Reporting Requirements.

Now, if you have not input your question, there is still some time to do so. So go ahead and click on the dropdown arrow next to the Ask Question field and then type in your question and click Send. Now, the entire presentation team, Bethany, Kathy, Loretta, and Marianne, are going to stay on with us to answer your questions. So let's jump right into those questions so we can get to as many questions as time allows. So let me head over to the Q&A.

All right. So it looks like our first question is in regard to the 6013 election. So the question is, how is a 6013 election suspended or terminated?

I'll take that question, Anika. This is Kathy. So the 6013 elections, it is a one-time election, and it can be terminated by either spouse, so they can attach a statement to the return, or if they file separately and that would be effective in the year that the statement is made. It would also be suspended if, or terminated if, either spouse passes away, or if there's a legal separation or a divorce, or in rare occasions the IRS can also terminate that election if they're no longer in compliance; let's say one of the spouses fails to report their worldwide income, or if they become ineligible for the election. We use the word suspension, but suspension is kind of the same thing as if it's terminated. If you previously made a 6013(g) election and then you file married filing separately, then that would be a revocation and it would terminate the election. So hopefully that answers that question.

And then there are also a couple other questions regarding the 6013 elections. So you cannot make an inadvertent election, so you do need to include that statement with the tax return. You can't just include that other spouse on the return. You have to include the statement, and it cannot be made electronically. There are several questions regarding how do you include a statement on an electronic return. So for all of the elections, not just the 6013 election, but where a statement is required, you do have to paper file that return. So when we say a statement, it must be included on that paper-filed return. Also, for the 6013 election, the other spouse must have either a Social Security number or an ITIN. So, if you know that that's what you're going to do that year, then you'll need to put in that application for an ITIN for the non-resident spouse. I'll turn it back over.

Thank you so much. A lot of information there, so hopefully that will benefit -- that helped the audience out a lot. Okay, so it looks like our next question is related to the Foreign Tax Credit. So it says, if a foreign government assesses taxes against an individual taxpayer, can you take a Foreign Tax Credit on an individual 1040? The taxpayer is a resident for tax purposes in that country.

Hi, this is Maryann. I could take that question. So taxpayers who are eligible for the Foreign Tax Credit are US citizens and US residents and certain non-residents. Also, there must be four tests that must be met for any foreign tax to qualify for the Foreign Income Tax Credit and the first one is that it must be a tax imposed on the taxpayer; the second is you must have paid or accrued the tax; the third is the tax must be an income tax or a tax in lieu of an income tax; and the fourth test is that the tax must be the legal and actual foreign tax liability.

Thanks. Thank you so much for that response. Okay, so it looks like our next question is in regard to the self-employment tax. So it says, are self-employment subject to employment taxes also? 

Okay, this is Bethany. I'll take that question. I think what they're asking is if a person who's a US citizen or resident is living and working in a foreign country, self-employed there, is that subject to self-employment tax and the answer to that is yes. If you're a US citizen or resident working in a foreign country, you're subject to self-employment tax unless, as I believe Kathy mentioned earlier, the terms of the totalization agreement apply. The totalization agreement is an agreement between the Social Security Administration of the United States and that of another country. So if you're living and working in a foreign country that has a Social Security agreement, also referred to as a totalization agreement, in place, then the terms of that agreement would govern, and on your US income tax return, you would -- where on the line for self-employment tax, you would write exempt if that's the case and attach a certificate of coverage from the foreign country Social Security agency indicating that they are covering you under their program and that you're paying into that one instead. So I hope that answers some of that question.

I think I also saw a question about where were the agreements available, you could look at the Social Security's website for that and I think that was also mentioned in the slides. And I see that the next question in the list has to do with married citizen and green card holder who move out of the country. Will the green card holder automatically become a nonresident after a period of time? And the answer to that is no. And we do sometimes provide webinars. We did in September. Those may still be online. Are those still online? Does anyone know?

Typically, the archived webinars are made available on YouTube, so if interested, I would encourage the audience to just visit our YouTube page and look for that webinar.

Thank you. Yes, so you may want to access those on the IRS' YouTube channel. We have one on residency status, so that goes into greater depth on that, but the answer is no. Cutting up a green card, living outside the US, those kind of things do not take away that requirement. Well, the fact that you're alive lawful permanent resident and are required to report and pay taxes to the United States on worldwide income. So that's something you might want to look at the webinar for further information.

And then there is another one on self-employment tax right below that. I think I already basically answered that. It says if you have citizens living abroad, do they pay SE taxes to the US -- self-employment tax to the US even though it's a foreign source income? And the answer to that is yes. Now we're talking about self-employment. And then I'm sorry, there's another one, any additional reporting requirement for US citizens running a self-employment activity abroad? Well, it would be the same as it would be here. You would file a Schedule C and you would claim ordinary necessary normal business expenses. If a person qualifies, and you'd have to qualify, and we talked about that today, if you qualify for the Foreign Earned Income Exclusion, then there is the possibility to do that as well, but it does not affect the Schedule C.

The Schedule C and the Schedule SE for self-employment tax are not impacted by the fact that you're excluding foreign earned income, and if you are a sole proprietor excluding your foreign earned income, it comes out of Schedule C gross income, not out of the net amount, and then it gets reduced by a ratable share of the Schedule C expenses, so if I had $300,000 in Schedule C gross income, and let's say to make it simple that the tax year was 2025, because that was an even $130,000, right, that you could exclude. So I could exclude $130,000 of the Schedule C gross income, but I have to reduce it by $130,000 divided by the full $300,000 times the expense amount, and I have to do the same with the deduction for half of my self-employment tax.

So I reduce my foreign earned income exclusion of $130,000 by those amounts, and if there is interest among any of you in having a webinar specific to that, to sole proprietors and foreign earned income exclusion, I would be delighted to -- help present one of those. So if that's something you're interested in, after this, after this webinar, there will be a survey at the end, and you may want to put in a request for that. We could also do one on partnerships, people that are maybe part of a US partnership that are working overseas, which isn't real common but could be possible.

All right, thank you so much. That was a lot of great information there. So we're going to move on to the next question. And so it's, where can we find treaty information?

There is a website, treaties - A to Z on irs.gov.

That could be helpful. All right, so hopefully that's helpful to the audience. All right. So our next question is in regards to extension. So does the automatic two-month extension still count towards the failure to pay penalty based on the April 15th deadline?

I'll take that one, Anika. This is Kathy. So the failure to pay does apply. So just like that October 15th extension, you still have to pay the taxes due by April 15th. So you can request that extension to June 15th to file, but you do need to pay the tax due by April 15th. And I also saw a question regarding how to request that automatic two-month extension. There's not a form to file. Again, you will have to include a statement on your tax return, and you're going to -- in that statement, you're going to mention that you did live abroad and that you met the criteria and that you do qualify for that two-month extension. But make sure and pay the tax by April 15th because the penalty will apply as well as interest.

Thank you so much for that response. So it looks like our next question may deal with money earned in a foreign country, but you're working for a US company. So it basically, it says that what if the services were performed for a US company, but you were paid while working in a foreign country? Does anyone want to elaborate on that one?

Okay, well, this is Bethany. I guess I'll go ahead and answer that. If services are performed for a US company and you're receiving your salary because you're working for that US company in the foreign country -- I take it that's what they're asking. So I'm living in a foreign country, my employer is a US entity, but they have me working over there. If that's the case, that is still foreign source income. So I hope that answers that question.

Okay, I think that's a great explanation. It makes sense to me. So the next question again is in regards to foreign earned income. So for foreign earned income, if the taxpayer is performing service in Mexico and paid by a US person, my understanding is that this qualifies as foreign earned income. You pretty much covered that, but did you want to elaborate on that? It says regardless of the payer except US government, correct?

Yeah, that's correct, and I'm sorry because I meant to kind of answer that one in conjunction with the other one. So yes, that is absolutely correct, and -- thank you. Okay. All right.

And so the next one, we're still talking about earned income. So just to be sure, income earned in a foreign country by a non-resident who elects to be treated as a resident to file a joint return with a resident spouse is allowed for the foreign income exclusion. 

This is Bethany. I'll take that one as well because I saw several like that where people were asking about that 6013(g) election where the non-resident spouse is electing to be treated -- electing under the Internal Revenue Code under 6013(g) of the code to be treated as a US resident for US tax purposes, and because if they have that election in place, then since they are electing to be treated that way, we are going to indeed treat them that way. And so that is correct that they would be eligible then for the Foreign Earned Income Exclusion, but I do want to point out they also need to be sure that they're putting all of their worldwide income on that tax return, not just their foreign earned income, but all income.

Okay. Thank you so much for that explanation. So our next question is pretty simple. So it says, do government employees include contractors as well? 

Okay. This is Bethany again. I'm sorry. I do love the Q&A section, though, I have to admit, and I'm sorry, but -- I wait a minute, but if nobody else is picking it up, I'll take it. And I think that was one that I had noticed earlier and wanted to answer anyway. So, does the government employee include contractors? Well, if I am working on a Schedule C basis, you mean, like a sole proprietor, and I have my own company, then yeah, I'm not a government employee. Likewise, it may be that there is -- a company that has a contract with the government, that they have hired me just as their W-2 employee. So you may be working for a -- for an entity that is contracted with the government, but that does not make you a government employee.

Now, I also saw another question, and it had to do with people that are working perhaps in foreign -- in US embassies in foreign countries. Well, I would imagine that many, if not most of those, would be State Department, US State Department employees, so they too are government employees. Now once in a while we do run across a scenario where there's a personal service contract, and so they got a 1099 from the State Department, but it was done as a personal service contract, and our position historically has been that they are still an employee in that particular case if there's a personal service agreement or personal service contract in place between them and the US, which is not exactly the same as -- let's just say that I'm a US individual and I live in a foreign country and I'm -- I have a plumbing company, I'm a plumber.

And I'm a sole proprietor plumber, and the Embassy had sinks that were backed up and they contracted with me that would be different. That's not -- I'm probably not getting a personal service contract. But if I'm sitting at a desk every day at the Embassy working for them, and it's on a 1099 and they call me a personal service -- you know, it's on a personal service contract or personal service agreement, that would be more in the nature an employee, and that's usually our position when those come across our desk here at the IRS.

Okay. Okay. So it's -- next question is, so are -- is combat pay only determined by executive order, or are there other ways in which combat pay combat zone pay, excuse me, can be declared?

Okay. That's another one -- this is Bethany, that I will take. The president -- when I talked about combat zones, I was not as much referring to combat pay, but we'll touch on that in a minute, as the fact that there are certain areas designated as combat zones. I believe that information exists on IRS.gov if you just do a Google search for IRS and combat zone, and perhaps say executive order, and then that should lead you to the right page. But so while there are specific places, and those are very, very specific, right, and that had to do with people that were living and working in a combat zone. And working in support of the armed forces. Usually they're working for one of those defense contractors, a big company that contracts with the Department of Defense, and then you're one of their employees, and you're living and working in a combat zone, and that of course is not combat pay. That is if you meet the criteria, and it's, you know, tax home in a foreign country, but you don't have to meet the abode prong, and then of course the physical presence test, et cetera.

There are people that are in that position that may be able to exclude. Again, they're not government employees. Now, combat pay, or danger pay, or hazard pay, that has to do with people that are in our military and are working in a combat zone. And we do get combat pay, combat zone pay, danger pay, hazard pay, That does not show on your W-2, so there is no reason that one needs to exclude that. And if you see that it is on your W-2, you aren't able to take it off on the tax return, you would need to go back to the issuer, the finance center, the US Finance Center that's issuing it, and suggest that they correct your W-2 for you and have them file a corrected W-2.

All right. Thank you so much for that detailed response. So, I'm just – okay, so this next question coming up is a little lengthy. It's in regards to the 6013(g) election. So, and here's the question. An expatriate employee made a 6013(g) election in the US, returned to their home country after two years, and became a non-resident. five years later, they were assigned to the US again. If they did not revoke the 6013(g) election, can they file a joint return for their second US assignment? Additionally, I would like to confirm that the years in which he is not a US resident, neither he nor his spouse are obligated to file US tax returns? Anyone want to take a stab at that one?

Okay, and that one's on me. I will take that one as well. The first part of it is a little convoluted, I must admit. I can't quite understand the entire question here because it's talking about an expatriate, and they returned to their home country after two years and became a nonresident, and I'm not clear on that. But generally speaking, so I can't answer the very specific stuff there because it's a little confusing how they were an expat but then they became a nonresident after that. But just in a general way, if a couple makes a 6013(g) election, until they revoke that they revoke that election, or if for whatever reason the government took it away from them or something, okay, but until they revoke that election, it should be in place. So if you have a year or several years in which it doesn't apply at all, I mean, you left the US for several years and -- well, you still, no, you still have to, yeah, they have to keep filing. They have to keep filing.

They file either MFS or MFJ after the initial year. So the first year it's a joint return; after that, it can be separate. And there was a question in here somewhere else about how do they undo the election, and that would be yes, to attach a statement to the return to revoke it. So if this person filed a 6013-G election and then left the US, they needed to keep filing. As long as that election is in place, you're taxable on your worldwide income regardless of where you live, even if you're overseas. So I hope that answers the question that once it's in place, you pay tax on your worldwide income. After the initial year, you can do married filing separate or married filing joint, but you continue to do that. And if you want to revoke it, then you let the government know that and send a statement to that effect.

Thank you for tackling that question because that was a very detailed question. But our next question is fairly simple, so the question is, is the foreign earned income exclusion a year-by-year election?

Okay, that was another one that I guess I will take too. It is in a sense. I mean, like I said, you can change the Foreign Tax Credit, but you can't go back to the Foreign Earned Income Exclusion then for the next five tax years. Now, I also saw a lot of questions about the interplay of the two. I want to make it clear, once you elect to exclude your foreign-earned income, unless you want to revoke that election, you have to exclude the foreign-earned income to the degree that you're able and someone had asked if you could bifurcate it.

No, you can't. You can't say, I want to take half of my income this way, as a foreign-earned income exclusion, and the other half as foreign tax credit, unless of course of course, by bifurcating it, it was exactly the one-half was exactly the max amount. Once you've maxed it out, so again, just using 2025 as an example, it's a simple year with $130,000 threshold maximum. So if you made $200,000 that year, you could exclude $130,000 and then get Foreign Tax Credit on the remaining $70,000, and that would be fine because you maximized the exclusion. So you have to max it out before you turn to the Foreign Tax Credit, otherwise it's considered a revocation. You're also allowed to claim a Foreign Tax Credit, of course, on things like dividends and interest and other things that are not foreign-earned. There's nothing wrong with that. You can always do that on the non-earned portion.

And then I also saw there was -- and I'm sorry, I think I misspoke on an example I was giving about the 330 full midnight to the and I meant to say 165 days and 165 days or something like -- or maybe it was 150 and 150 with a break in the middle. Let me think about that. No, yeah, 165 and then a break is what I meant to say, and then another 165. So if there was a 20-day break between the two pieces of 165, that would be still all within that 365-day period, consecutive days of the 12 consecutive months, which would be 365 consecutive days, maybe 366 in a leap year.

And then someone asked, how do you count travel days? Remember, it's got to be midnight to midnight, so the day you arrive doesn't count, the day you depart doesn't count. And then another thing I just want to point out before is each person in a couple, each spouse stands alone on their own 2555 and they meet the requirements by themselves. So you can have two 2555s, one for each spouse, but each one has to meet the requirements. Or you could have one 2555 because one spouse met the requirement, then they can put their income on there. The other spouse then may not be able to take it if they didn't meet it.

I'm sorry, go ahead. Anika, I know we're almost at the end.

No, it's totally okay. So we are actually at the conclusion of our Q&A portion. Bethany, maybe we should just bring you back to just answer questions. But audience, that is all the time that we have for questions. I want to thank Maryann, Loretta, Kathy, and Bethany for such a comprehensive presentation and for answering your questions and sharing their knowledge and expertise. But before we close the Q&A session, Kathy, can you start us off with some of the key points that you want the attendees to remember from today's presentation?

Yes, certainly, and a lot of great questions. Good job, everybody. So, some key points from today that we want you to keep in mind, so the US generally taxes its citizens and its residents on worldwide income. So those who live and work in a foreign country and meet the requirements may be able to exclude some of that foreign earned income.

Now we'll turn it over to Loretta, she's going to mention some key points from foreign tax credit.

Okay, great, thanks Kathy. With regard to the foreign tax credit, one thing to remember is that it is there to alleviate part or all of the double taxation. And another item to note, beginning in the year 2021, there's two additional schedules that are part of the Form 1116, and they're Schedule D and C. They report the carryovers and carryback of excess foreign taxes and also report if there are foreign tax redeterminations. And then also with regard to the FBAR requirement, if at any time during the tax year taxpayer has a financial interest or signature authority in a foreign bank account, they have a filing requirement of filing the FBAR, or it's also referred to now as the FinCEN Form 114, and that's if they -- the balance of the account at any time during the tax year exceeded $10,000 US. And now back to you, Kathy. Thanks, Loretta.

So US citizens and residents working abroad may be subject to employment tax, or FICA, and self-employed US citizens and residents are responsible for paying self-employment tax as well, which is SICA, if net earnings from that self-employment equals or exceeds $400 regardless of where they live and work. And remember, this is only for self-employment taxes and employment taxes. So if the US has entered into a totalization agreement with the foreign country in which the wages are -- or net earnings from self-employment were earned, the terms of that agreement will govern whether FICA or SECA taxes must be paid to the US.

So if a totalization agreement applies and you are covered by the Social Security system of that foreign country, you would need to request a certificate of coverage or a similar statement from the appropriate agency of the foreign country. But if you are unable to obtain a certificate or a statement from that foreign country, you will request one from the US Social Security Administration. And if you're self-employed, you'll attach the certificate or the statement to the tax return and print exempt, see attached statement, on the line on the tax return for self-employment tax. Now that's all we have. Anita, I'll turn it back over to you.

All right, so thank you, Kathy and Loretta, for those key points. Now, audience, we do want you to watch out for announcements on future webinars. To register for any upcoming webinars, please visit IRS.gov and perform a keyword search for webinars and select the Webinars for Tax Practitioners or Webinars for Small Businesses. And when appropriate, we will offer certificates and Continuing Education Credit for upcoming webinars.

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