Foreign Income Exclusion Form 2555

As a US citizen or a resident alien you are taxed on your global income earned wherever in the world. However, if you are living outside the country and also residing there, you can earn a Foreign Income Exclusion on the income earned abroad. This reduces your total taxable income in the US. Is the concept of Foreign Income Exclusion this simple?

No, it’s not. There are various terms and conditions which must be fulfilled before you become eligible to avail the benefits of Foreign Income Exclusion. Let us understand what these conditions are –

Who is eligible for Foreign Income Exclusion?

US citizens and resident aliens would be deemed eligible for claiming a Foreign Income Exclusion if they satisfy all the following three criteria:

1. US citizens or resident aliens should have a foreign earned income
2. Their tax home must be in a foreign country, i.e. not in the United States of America
3. They should meet any one of the following requirements:
   • The individual has passed the bona fide residence test. This bona fide residence test is meant for US citizens who have been a bona fide resident of one or more foreign countries for a continuous period which includes one full US tax year.
   • The individual is a resident alien who has passed the bona fide residence test of being a bona fide resident of one or more foreign countries for a continuous period which includes one full US tax year. Resident aliens of US are allowed a bona fide presence test only if the individual is a citizen or national of a country with which the US has affected an income tax treaty.
   • The US citizen or resident alien has passed the physical presence test. This test means that the taxpayer has been physically present in one or more foreign countries for a minimum of 330 days during any period of 12 consecutive months.

What is the amount of exclusion?

The maximum amount of exclusion is a dynamic figure which is adjusted for inflation every year. Currently, for the year 2016, the maximum allowable exclusion limit is $101, 300.

How to avail the exclusion?

The Foreign Income Exclusion can be earned if the individual files IRS Form 2555. Form 2555

This Form needs to be duly filled and filed with the IRS within the stipulated time along with Form 1040. For 2016, the latest date of filing is 17th April, 2017. Claiming tax deduction on foreign earned income lowers down the income taxable in US and is beneficial for US citizens and resident aliens. So, know the details of Form 2555 which lets you avail such exclusions and save your taxes.

Choosing the Right Filing Status Can Save Your Hard Earned Money

Our money is always hard-earned. Right filing status We work day in and day out to earn our living and so do not like to part with our hard-earned incomes.

However, paying income tax is our federal duty and every year we are required to pay tax on our incomes. Our filing status determines the amount of tax we are supposed to pay.

There are five distinct types of filing statuses. Did you know that choosing the correct status can help you in saving taxes?

Yes, you heard me right. Despite there being five different statuses, you can qualify for more than one status. In such a case, choosing the most beneficial status (read the status which saves maximum tax) would help you save your hard-earned money. Want to find out how? Let’s breeze through the five filing statuses first.

1. Single

Divorced, widowed without having dependents, legally separated or married individuals fall under this status. You can also qualify under this status if you are not a primary caregiver to a dependent for more than 6 months or if you do not qualify under any other statuses.

2. Married filing separately

If you are married and both you and your spouse are earning members, you can opt to file your returns separately. If you choose to do so, your tax filing status becomes ‘married filing separately’.

3. Married filing jointly

If you are married, you can also file joint returns instead of filing separately. Filing jointly lets you avail good tax exemptions. Moreover, if you are married and your spouse died during the year, you can file your returns under this status for the year in which your spouse died.

4. Head of household

To qualify for this status, you should be unmarried and should have borne the cost of yourself and a dependent living with you for more than 6 months. You can also qualify for this status if you are married but are living apart from your spouse for more than 6 months and also maintaining a separate home for yourself and a dependent.

5. Qualifying widow/widower with a dependent child

If you are a widow or a widower living with your dependent child, you qualify for this status. You should be unmarried post your spouse’s death to qualify for the status. Moreover, you can claim the benefit of this status for a maximum of 2 years after your spouse’s death.

These are the five filing statuses for filing your returns.

How the right status saves your money?

If you qualify for one status, you have to file your taxes as per the tax bracket of that status. But what if you qualify for more than one status? For instance, if you are married, you can either file separately or jointly. In these cases, you should choose the status which gives you maximum tax exemptions. Your filing status determines –

• Your standard deduction – this deduction lets you reduce your taxable income by a specified amount depending on your filing status. For instance, if you qualify for single or married filing separately, you get a deduction of $6300, but for filing jointly or being a qualified widow, the deduction rises to $12,600. Similarly, head of households can claim a deduction of $9300.
• Your tax liability – the rate of tax applicable on your taxable income depends on your filing status. Different statuses have different tax brackets based on which your tax liability is computed. For instance, if you are married but file separately, any income up to $9275 would be taxed at 10% but if you file jointly, the 10% tax rate would apply to incomes up to $18,550.

So, when you qualify for more than one status, sit with your calculator. Compute your tax liability under each status and then choose the one with the lowest tax incidence.

Even the IRS urges you to take advantage of these filing statuses to lower your tax liability and save your hard-earned money.

So, now you know how you can save money on your taxes. Just a simple knowledge of your filing status is enough to help you. So, find your status today and lower your tax liability.

Worried About Double Taxation?

Globalization has brought about a demographic change and more and more Indians are moving to and settling abroad in different countries. Though it is a good career opportunity, there is a concern for tax treatments when NRIs generate income both in their country of residence and also in India. Though paying taxes is an individual’s federal duty, paying double taxes is truly a nightmare.

The principles of taxation dictate that a tax is supposed to be paid on any earned income.

If you are staying in one country and earning income in another, are you required to pay taxes on the same income twice?

The concept of paying tax on the same income generated in another country due to different tax laws which overlap one another is called double taxation. This double taxation is avoided through the Double Tax Avoidance Agreement (DTAA) signed between major countries. Before we move on to the fundamentals of DTAA, let us understand the fundamentals of taxation as a whole.

Tax is levied on an individual based on his residential status and income generated.

An individual’s residential status depends on the number of days he has stayed in a country.

For instance if an individual would be called a resident Indian if he has

• Stayed in India for a period of 182 days in the last financial year, or
• Stayed in India for a period of 60 days or more in the last financial year but for an aggregate period of 365 days in the 4 years preceding the last financial year,

If the individual does not fulfill any of the above criteria, he is considered a Non-Resident Indian. While a resident Indian pays tax on his global income, a NRI pays tax only on the income generated in India.

Similarly, in USA, an individual is categorized as a US resident if:

• Is a Green Card Holder or qualifies to hold a Green Card, or
• Has stayed in USA for 31 days in the last financial year and a total of 183 days in the last three financial years including the last financial year

A US resident is also required to pay taxes on his global income. So, what happen if a US resident has a source of income from India? Does he pay tax on his total income in US and also for the Indian income in India?

Under Section 90 of the Income Tax Act, 1961, India has a bilateral DTAA relief for NRIs in USA. Such NRIs can claim double taxation relief using either of the following methods:

• Exemption method
• Tax credit method by filling and submitting Form 1116 of the Foreign Tax Credit Rules

Let us understand how double taxation works

You are a US resident and hold financial assets (bank accounts, mutual funds, insurance policies, FD, investment in stock markets, etc.) in India.

Tax treatment – under the treaty signed between US and Indian Government called FATCA, you are required to report these assets to IRS (Form 8938 and FBAR). If such assets earn income, you have to pay taxes on this income in US. If the earnings are taxed in India, you can claim tax credits while filing your US tax returns. This tax credit can be earned by filling form 1116 which pertains to Foreign Tax Credit Rules.

Illustration – Mr. A is an Indian citizen residing in the United States for the last 5 years. He earns an annual income of $150, 000 in US. Along with it, he earns Rs.20, 000 from his investments in India on which Rs.5000 (supposedly) is deducted as TDS. So, let us see how taxation would affect his earnings under the double tax arrangement. Tax treatment under Tax Credit Method

Tax treatment under Tax Exemption Method

Since his income from India was already taxed, he claimed tax credit for the same in his US tax return. This is how the concept of double taxation works.

Social Security Benefits

Being a US resident or citizen, you must be aware of Social Security benefits provided by the State. Every employed individual, throughout his working career, contributes to the Social Security system also called the Old Age, Survivors and Disability Insurance Program (OASDI). This contribution accumulates into a corpus from which Social Security Benefits are paid put after retirement or permanent disability.

There are, basically, four different types of Social Security Benefits you can avail.

The rate of these benefits would depend on your earnings. The benefits are as follows:

• Retirement benefit – if you have been employed at a non-governmental organization for a minimum period of 10 years, you are entitled to this retirement benefit when you retire. The benefit is available if you retire any time after attaining 62 years of age. However, if you retire post 65 years and then claim the benefits, you would be paid higher.
• Disability benefit – if you are not nearing your retirement age but suffer permanent disability, you can claim this benefit. The disability benefit would be about the same as retirement benefit.
• Survivors benefit – if you are the spouse of a disabled or a retired worker who qualified to get the disability or retirement benefit but is dead, you can avail the survivor benefit. Your minor and/or disabled children also qualify to get the survivor’s benefit. The amount of benefit would depend on your dead spouse’s earnings over the years.
• Dependents benefit – if you are the spouse of a disabled or a retired worker who is alive and qualifies to get the disability or retirement benefit, you qualify to avail the dependents benefit whether you actually depend on your spouse or not. Your minor and/or disabled children also qualify for this benefit.

Taxability of Social Security Benefits

The taxability of your Social Security Benefits would solely depend on your filing status and your combined income from all sources. If you have income from other sources and your total income, (including Social Security Benefits) crosses a pre-defined limit, a portion of your Social Security Benefits would be taxable. This pre-defined limit is called the base amount and it depends on your filing status. The amounts are:

To find whether your Social Security Benefits are taxable or not, you should take half of your social security income and add it to all other incomes. The total figure should then be compared against the above-mentioned base amounts.

If the figure is higher than the base amount, your Social Security benefit might be taxable.

To calculate the taxability you can follow the Form 1040 instructions when you file your tax. There is a worksheet in Form 1040 and Form 1040A which can be used for the same.

Whether your Social Security Benefits are taxable or not you should disclose it when you file a claim. Form 1099-SSA shows the total amount of Social Security Benefit you receive in a year. When you are filing your tax return in Form 1040, line 20a is meant for entering your Social Security Benefit amount. If you file Form 1040A the corresponding line is 11a.

Social Security Benefits help you when your source of income stops on retirement or disability.

They also provide benefits for your spouse and children. Most of the time, these benefits are not taxable if they are below a certain limit. However, you have a legal responsibility of displaying your Social Security Benefit irrespective of whether