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March 19, 2013

Expats - Home Office Deduction

If are an expatriate employee (of a US or foreign company) or self employed abroad and  you use part of your home for your business, you may qualify to deduct expenses for the business use of your home. Here are six facts from the IRS to help you determine if you qualify for the home office deduction.
1. Generally, in order to claim a deduction for a home office, you must use a part of your home exclusively and regularly for business purposes. In addition, the part of your home that you use for business purposes must also be:
• your principal place of business, or
• a place where you meet with patients, clients or customers in the normal course of your business, or
• a separate structure not attached to your home. Examples might include a studio, workshop, garage or barn. In this case, the structure does not have to be your principal place of business or a place where you meet patients, clients or customers.
2. You do not have to meet the exclusive use test if you use part of your home to store inventory or product samples. The exclusive use test also does not apply if you use part of your home as a daycare facility.
3. The home office deduction may include part of certain costs that you paid for having a home. For example, a part of the rent or allowable mortgage interest, real estate taxes and utilities could qualify. The amount you can deduct usually depends on the percentage of the home used for business.
4. The deduction for some expenses is limited if your gross income from the business use of your home is less than your total business expenses.
5. If you are self-employed, use Form 8829, Expenses for Business Use of Your Home, to figure the amount you can deduct. Report your deduction on Schedule C, Profit or Loss From Business.
6. If you are an employee, you must meet additional rules to claim the deduction. For example, in addition to the above tests, your business use must also be for your employer’s convenience.

If you are an employee of a US or foreign corporation and qualify this deduction goes under miscellaneous deductions on Schedule A.  If you are self employed it goes on your schedule C. You can get more information in IRS Publication 587 which can be downloaded here.

As a US expat, there may be many deductions or other tax savings strategies you may not know about. Read more at or at

March 18, 2013

International Flight Attendants & Pilots Use of Foreign Earned Income Exclusion is Limited

The Tax Court has held that an international flight attendant  (this ruling would apply to pilots also) could not use the foreign earned income exclusion to shield all of her wages from tax. Rather, she could only exclude that portion of her wages that was allocable to her flight time that occurred within or over foreign countries.

 A qualified individual may exclude foreign earned income from gross income. (Code Sec. 911(a)) Foreign earned income is earned income received by an individual from sources within a foreign country. (Code Sec. 911(b)(1)(A)) Code Sec. 911 does not define “foreign country.” But the regs provide that the term “foreign country” when used in a geographical sense includes any territory under the sovereignty of a government other than that of the U.S. They go on to provide that the term includes the territorial waters of the foreign country (determined in accordance with the laws of the U.S.), the air space over the foreign country, and the seabed and subsoil of those submarine areas which are adjacent to the territorial waters of the foreign country and over which the foreign country has exclusive rights, in accordance with international law, with respect to the exploration and exploitation of natural resources. (Reg. § 1.911-2(h))

Consistent with this reg, the Tax Court has held that a U.S. taxpayer is allowed the foreign earned income exclusion only for wages earned while in or over foreign countries and not for wages earned in international airspace or in or over the U.S. (LeTourneau, TC Memo 2012-45)

Facts. Yen-Ling K. Rogers was a U.S. citizen and a bona fide resident of Hong Kong. She worked as a flight attendant for United Airlines (United) on international flights based out of Hong Kong International Airport. Under an agreement between United and the union for flight attendants, (1) Yen-Ling accrued nonflight time, such as sick and vacation hours, based on the period of her flight attendant service; and (2) United compensated her for additional categories, such as required training and meetings and the performance incentive program.

United required Yen-Ling to perform preboarding and postarrival services on every flight on which she worked. She was required to report to work 1 hour and 45 minutes before the departure of a flight and to perform approximately 30 minutes of postarrival services. The flight time begins at “out time,” when the plane's brake is released and the plane pushes back from the airport. The flight time ends at “in time” when the plane's parking brake is set after landing. Yen-Ling was not separately compensated for the time spent performing preboarding and postarrival services.

In 2007, Yen-Ling worked the following flights: 16 flights between Hong Kong (HK) and San Francisco (SFO); 16 flights between SFO and HK; 14 flights between HK and Chicago (CHI); 14 flights between CHI and HK; 5 flights between HK and Ho Chi Minh City; 5 flights between Ho Chi Minh City and HK; 2 flights between SFO and Nagoya; and 2 flights between Nagoya and SFO.
The percentage of Yen-Ling's flight time within or over foreign countries during 2007 was as follows:
  • HK-SFO-HK, 63.38% foreign flight time,
  • HK-CHI-HK, 86.05% foreign flight time,
  • HK-Ho Chi Minh City-HK, 100% foreign flight time, and
  • SFO-Nagoya-SFO, 29.19% foreign flight time.
United reported $41,762 of wages to Yen-Ling for 2007 on Form W-2, Wage and Tax Statement. United provided her a duty time apportionment for her flights during 2007 that apportioned the minutes of her flight times within or over the U.S., international waters, and foreign countries.

Yen-Ling excluded 100% of her United wages as “other” income on a joint return she filed with her husband for 2007. The “other” income reported on her Form 1040 was specified by reference to the attached Form 2555EZ, Foreign Earned Income Exclusion. On the Form 2555-EZ, she reported $41,762 as the total amount of foreign earned income she earned and received in 2007 and the same amount as their foreign earned income exclusion.

Exclusion limited. The Tax Court observed that even though Yen-Ling excluded wages as foreign earned income, she stipulated that only a percentage of her flight time occurred within or over foreign countries. Therefore, the Court concluded that only a percentage of her United wages qualified for the Code Sec. 911(a) exclusion.

The  Tax Court concluded that her stipulated flight time percentages applied to any of her wages that are allocable to nonflight time that was based on international flight attendant services she performed for United. The Court said that there was no rational basis for allocating these forms of compensation 100% to foreign earned income.

Visit our website at to learn more about IRS International Tax Rules that affect pilots, flight crews, and crew who work on ships, cruise lines, etc. Let us help you with your tax returns.

March 15, 2013

How Nonresidents can Obtain an IRS ITIN from Abroad

If you are a nonresident who needs to file a US nonresident tax return or you have a spouse who is a nonresident and wish to make the election to file a joint return with them (it can often reduce your US income taxes) you need to get an ITIN (Individual Taxpayer Identification Number) because they are not eligible to get a social security number. You must have this number to file a tax return, and many banks and others require it before you an open a US bank or financial account.
Effective January 1, 2013, new ITIN procedures took affect for the Individual Taxpayer Identification Number (ITIN) application process. Some of the information below, including the documentation requirements for individuals seeking an ITIN, has been superseded by these changes. Taxpayers and their representatives should review these changes, which are further explained in these Frequently Asked Questions, before requesting an ITIN.
Alien taxpayers who need an Individual Taxpayer Identification Number (ITIN) may be able to secure one from outside the United States.
The IRS has permanent staff available that is able to help process Forms W-7, IRS Application Number and Instructions (PDF) at the following U.S. embassies overseas: Beijing, Frankfurt, London, and Paris. The addresses and phone numbers of these overseas offices may be found a tContact My Local Office Internationally. In addition, there are public accounting firms overseas in certain countries which are Authorized Acceptance Agents for ITIN numbers. You will find their names and addresses at the Acceptance Agent Program page.
US Embassy Beijing, China - IRS has
agents in almost every US embassy.
The IRS also accepts a Form W-7 by mail accompanied by ORIGINAL documents or certified copy of the document from the issuing agency establishes the identity and foreign status of the ITIN applicant.
The Instructions for Form W-7 list 13 documents that can be used to prove foreign status and identity. A foreign passport is the only one that can stand alone (i.e., establishes both foreign status and identity). If a passport is submitted, there is no need to submit any other documents. If a passport is not submitted, a combination of at least two other documents, with at least one containing a photograph, must be submitted with the ITIN application. The IRS will accept copies of original documents, if the copies have been properly certified by:
  1. the government agency (foreign or domestic) which issued the documents, or
  2. employees of the U.S. State Department located in U.S. embassies and consulates abroad.

More Information:

If you need help filing your US nonresident tax return or filing an expat tax return with your nonresident spouse, we can help. We have been assisting US nonresident clients for over 30 years. Email us at  Skye: dondnelson or wisit our website at


March 12, 2013

Deadlines in 2013 For Filing Expat Taxes for Tax Year 2012

  • March 15, 2013.  Due date of Form 3520A which must be filed by Foreign Trusts when a US person has ownership or control. This form can be extended with Form 7004 until September 15th
  • April 15, 2013 – US tax return filing deadline for those living in  the US and due date for all taxes owed whether you are an expat or resident. If any taxes are owed after this payment, those amounts are subject to penalties and interest.
  • June 17, 2013 – US tax return abroad deadline for expats but can be extended by filing form 4868 prior to this date with IRS
  • June 30, 2013 – Foreign Bank Account Form is due (FBAR, or Form 90-22.1) - Must be received by IRS on this date (not date of mailing)
  • October 15, 2013 – Final tax deadline for US tax returns for expats abroad IF you have already applied for an extension. NOTE. There may be one more extension available until December 15th, if you file a letter request with the IRS under certain circumstances.
  • Forms 5471, 3520, 886,5, 8621 and most other foreign entity and special reporting forms are due on the extended due date of your personal tax return for 2012. If filed late, you may be subject to substantial penalties which are usually $10,000 or more.
Kauffman Nelson LLP, Certified Public Accountants have extensive experience over the past 30 years with US International, Nonresident  and Expatriate Taxation.  Visit our website at or email us at  Our skype address is: dondnelson.   Thank you. Don D. Nelson, Attorney, CPA.

March 3, 2013

Filing US Income Tax Returns in US Territories Such as Guam, Puerto Rico, Virgin Island, and Samoa

If you live in the US territories of  American Samoa, Puerto Rico, Mariana Islands, Guam or the US Virgin Islands you will be required to file US  income tax returns in that territory  and may or may not have to also file a tax return with the IRS. The rules and forms used may vary in each  jurisdiction. The filing requirements also are different if you are a US Citizen or Green Card Holder or a Nonresident.

The IRS has published an excellent guide explaining the filing requirements of each territory where can be READ HERE.    If we can help with the return preparation email us at or go to our websites at or 

Everything You Wanted to Know about the Foreign Earned Income Exclusion (IRS Form 2555)

One of the best tax benefits in the tax code is the foreign earned income exclusion.  If you live abroad in a no tax or low tax jurisdiction it allows you to save many thousands of dollars in US income taxes.

If you meet certain requirements, you may qualify for the foreign earned income and foreign housing exclusions and the foreign housing deduction.

If you are a U.S. citizen or a resident alien of the United States and you live abroad, you are taxed on your worldwide income. However, you may qualify to exclude from income up to an amount of your foreign earnings that is now adjusted for inflation ($91,400 for 2009, $91,500 for 2010, $92,900 for 2011, $95,100 for 2012). In addition, you can exclude or deduct certain foreign housing amounts.
You may also be entitled to exclude from income the value of meals and lodging provided to you by your employer. Refer to Exclusion of Meals and Lodging in Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad, and Publication 15-B, Employer's Tax Guide to Fringe Benefits for more information.

If you live in a foreign country where you must pay foreign income taxes, you can avoid double taxation by taking foreign tax credits which offset your US tax on that foreign income dollar for dollar.  We have over 30 years experience in assisting US expatriates, green card holders and nonresidents pay the lowest US income taxes possible. We can often help you avoid having to pay US state taxes also.  Email us at or visit our websites at or 

March 1, 2013

Expats Avoid State Taxes -Five States with Highest Income Tax Rates

As an US expatriate living and working or retired abroad, you can avoid paying state taxes and save substantial amounts of  income taxes.  It is very important because state laws do differ, that you take the proper steps to abandon you state tax domicile. Some states often allege you have still maintained that status if you keep sufficient contacts with the state or have an intent to return to that state in the future. It is only after you return from your assignment abroad, and that state asks about your unfiled state tax returns, that this issue usually arises.  By then, it could be too late to take the proper precautionary steps to avoid the problem.

CNBC has named the five states with the highest state and local income taxes as California, Hawaii, Vermont, Oregon and New Jersey.

California has a rule which allows you to claim non-residency status  for state tax purposes while living abroad even if you keep contacts with the State which is known as the "safe harbor rule."  To qualify you must:

  • Live and work under a written contract abroad for at least 545 days
  • Not earn more than $200,000 in investment income
  • Not return to California more than 45 days during any calendar year.
Under states have other various schemes to determine if they can still hit you with state income tax while you are abroad. You need to review the rules of the state you live in to determine how difficult it will be to cut state income tax ties.  Need help with this important tax planning step?  Email us at