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Tax Filing for US Expats in UAE & Foreign Earned Income Exclusion

This blog article discusses about Tax Filing for US Expats in the UAE and how they can qualify for the Foreign Earned Income Exclusion.

US Nationals and Green Card Holders who do not reside within the US or its territories or have any US income, are still required to file an income tax return and pay taxes on their worldwide income earned either through employment or through their ownership in a foreign company. In addition to income tax returns, they may be required to comply with Foreign Bank and Financial Account Reporting and Foreign Financial Asset Reporting. Very costly penalties can be imposed if they do not report correctly.

The Foreign Earned Income Exclusion is essentially a tool for workers that are living abroad. The exclusion is reported on Form 2555. Form 2555 can be included with Form 1040. As a US expat, 100% of their income is subject to the same tax rates that workers inside the US would be subject to. However, they can use things like the Foreign Earned Income Exclusion and the Foreign Tax Credit to reduce their US expat taxes. The Foreign Earned Income Exclusion allows them to exclude up to $97,600 of their foreign earned income on 2013 expatriate tax return, $99,200 on 2014 return. Since they will likely be paying for costs like housing and living expenses while earning income abroad, they may also be able to deduct some of these costs.

 Filing Taxes

In order for American expatriates to qualify for the Foreign Earned Income Exclusion, they are required to meet one of two criteria:

  1. Work full-time inside a foreign country for an entire calendar year — known as the Bona Fide Residence Test.
  2. Work inside a foreign country for at least 330 of any 365-day period — know as the Physical Presence Test.

If a person meets either of the above conditions, then they are allowed to exclude up to $97,600 of foreign earned income on 2013 expatriate tax return and $99,200 on 2014 return. If they are married filing jointly, they would be able to deduct up to $195,200 for him and her earned income from US expat taxes for the 2013 tax year ($198,400 for the 2014 tax year). This amount is also indexed for inflation and increases each year. Additionally, they would qualify for the foreign housing deduction.

THE UNITED ARAB EMIRATES (UAE) HAS ENTERED INTO AN INTERGOVERNMENTAL AGREEMENT (IGA) IN SUBSTANCE TO IMPLEMENT THE UNITED STATES’ FOREIGN ACCOUNT TAX COMPLIANCE ACT (FATCA). FATCA, enacted by the US Congress in 2010, and taking effect on July 1, 2014, is intended to ensure that the US obtains information on accounts held at foreign financial institutions (FFIs) by US persons. Failure by an FFI to disclose information on their US clients will result in a requirement to withhold 30 percent tax on payments of US-sourced income. The UAE intends to sign a Model 1 IGA.

Following Financial institutions in the UAE have started sharing extensive data of account holders with US nationality from July 1st with the Internal Revenue Services (IRS), or the American tax collecting authority.

On May 23, 2014, the UAE Central Bank has officially signed the agreement stating that all Foreign Financial Institutions (FFI) in the UAE will answer to the request of the Foreign Account Tax Compliance Act (FATCA) to share information about any account, assets, or transactions that are linked to the US with the IRS.

What will the Foreign Financial Institutions do?

According to the Model 1 IGA agreement that was signed by the Central Bank, the institutions will send information directly to the UAE government, which will send it on to the IRS. As per July 1, 2014, all pre-existing accounts will have to be identified with basic information such as the name, social security number/TIN, address, account number, current value etc. Apart from reporting the accounts that the FFI know as being linked to US individuals, the FFI has also had to do a manual search of all their files where the account has a value of $1,000,000 or more to check if there are links to the US.

What does this mean for the account holder?

Every US citizen living abroad has always been tax-compliant over all income and assets possessed, even if this is earned outside the US. The FATCA act, however, has provided the IRS with the improved tools to monitor financial transactions of its citizens abroad.

“FATCA and the so-called “FBAR” (now re-named FinCen Form 114) are inextricably linked, since the information supplied by FFIs can be cross-checked against the FBAR (as well as against general income tax forms such as your Form 1040 and Form 8938, for example).

Before June 30th this year, US citizens must have reported their tax liabilities of the tax year 2013. For US citizens with overseas accounts or assets the two mentioned forms are specifically important. “If these forms do not include the same information as the information provided by the FFI this is a big problem”.

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