When 911 is a Good Thing

Today TaxMama hears from Eric in San Jose, CA who wants to know, “Internal Revenue Code Section 911 allows you to avoid paying US taxes on money you earned while you are a resident of another country. What does it mean that you have to be a bona fide resident to qualify? Or to have physical presence in another country?”

Dear Eric,

First of all, you need to understand that Internal Revenue Code Section 911 refers to not paying taxes on earned income – up to $80,000 each year (as of 2005).

Earned income means income from a job or your own business. It does not help you avoid paying taxes on investment income or pensions.

To be a bona fide resident of a foreign country, you must be living there, long-term. You’ve established a home, whether bought, or rented. You’re living in and paying taxes to this country. You’re working there or running a business there. This is where you plan to stay for the foreseeable future. You’ve set down roots. And your present location has become your tax home.

On the other hand, to simply have a physical presence, you need to be working in the country (or countries) for 330 days out of 365 days each year. Your presence is only temporary. Perhaps you’re under contract for a specific project, or you’re traveling continuously across several countries.

You may end up spending several years, because your contract is renewed regularly – but you haven’t set down roots. But, you’re planning to return to the US to live.

The instructions for Form 2555 provide clarification and examples.

Of course, there are a number of tricks to qualifying for a given tax year, even if you haven’t lived there for 330 days by the end of the calendar year. And if you’re traveling extensively, not being in place for most of the time, you’ll want to keep really good records of the dates and places
you’ve been in – because you must list all the places on the Form 2555. (Your passport will be a good way to help you reconstruct your travels.)

This special exclusion, coupled with the Form 1116, Foreign Tax Credit can offer powerful ways to avoid paying US taxes, in the right hands. It takes someone who specializes in this area of taxation to find the best ways to use income exclusion and the tax credit to your advantage.

And remember, you’ll find answers to questions about foreign income exclusions and all kinds of tax issues, free. Where? Where else? At TaxMama.com

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