Do I Get Credit For Taxes Paid Abroad?

By: Pete
Date posted: 11.22.2011 (5:00 am) | Write a Comment  (0 Comments)

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One of the major assumptions that I’ve been making is that I will owe little to no income to the IRS. Why? Because I’ve paid a significant amount of money to the Canadian government while working here in Canada. Income taxes paid abroad do not always count however and from the answer to my IRS, all 3 of these conditions must be met in order to eliminate double taxation effects. There are additional details in publication 54 of the IRS which you can consult if you are unsure of your status.

1. Your tax home must be in a foreign country. Your tax home is the general area of your main place of business, employment, or post of duty where you are permanently or indefinitely engaged to work. You are not considered to have a tax home in a foreign country for any period during which your abode is in the United States. However, being temporarily present in the United States, or maintaining a dwelling in the United States, does not necessarily mean that your abode is in the United States. For details, see Publication 54.

2. You must have foreign earned income.

3. You must be either:
a. A U.S. citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year,
b. A U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year, or
c. A U.S. citizen or a U.S. resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.

Condition #1- Since I have worked for a Canadian employer, and lived in Canada in every year, I think my situation is very clear. I have not lived in the US either.

Condition #2-Yes, obviously

Condition #3- a is not as clear (you can read about bona fide residents here) but I do know for sure that the country I’ve been living in (Canada) does have a tax treaty so I do fill the second part of condition 3. You can see the list of countries that do have a tax treaty in place with the US here. I would also fill the third sub condition but I think the easiest to go by is the 3b so I will be satisfied with that.

It is also stipulated that any amount earned while working for the US government or one of its agencies would not be included.

Finally, there is also a way to get a deduction for housing amounts that would be paid for with employer-provided amounts. From what I understand, that does not apply to me so I will continue without looking more into this.

In my next post, I will look into which form I should be filing. The IRS suggested using one of these:

Form 1040, U.S. Individual Income Tax Return
Form 2555, Foreign Earned Income
Form 2555-EZ, Foreign Earned Income Exclusion

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