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Old 07-12-2011, 12:18 PM
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Join Date: Jul 2011
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"Estimated Taxes Not Required" + Foreign Earned Income + Got Married (Help!)

Hello all.

Before this year, my taxes were always very simple. This year, I'm suddenly in over my head...

This year, for the first time, I am working as a contractor instead of as an employee. All of my work is overseas, but for US based organizations. The organizations do not do withholding. I get paid in US dollars to my US bank account. This means that I should pay estimated taxes (I think).

Except: In IRS publication 505, page 17, there is an exclusion outlined under "Who does not have to pay estimated tax."

I meet all three of the requirements:
I had no tax liability for 2010 (owed $0 taxes - it was a lean year).
I was a US citizen for the whole year.
My 2010 tax year covered a 12 month period.

So, I decided that I do not need to pay estimated taxes this year and will take my income into account at the end of the year when I pay my taxes at the normal time.

Question 1 Based on the above information, is it true that I do not need to be paying estimated taxes?

Also, I am trying to understand "Foreign Earned Income."

Question 2 If I am living overseas while working, is my income "Foreign Earned Income" even if I am getting paid by a US based organization into a US based bank account?

I am also reading about a Foreign Earned Income Exclusion. As I understand it, I can exempt ~$90,000 of income if I reside outside the USA for at least 330 calendar days during 12 consecutive months based on the physical presence test. I will meet this test, but the 12 months will fall roughly 1/3 in 2011 and 2/3 in 2012.

Question 3 Given the above: For which year do I take the Foreign Earned Income Exclusion if at all? How does this work?

Finally, I got married in May 2011, which means that my wife and I will be filing jointly for the first time for our 2011 taxes. She will also be working overseas as a contractor for the same time period I will with the same organization. She will also not have to pay estimated taxes for this year (we think) based on the same exclusion I outlined above.

Question 4 How will getting married and/or filing jointly affect any of the above?

Question 5 Starting in January 2012 we expect to be liable for paying estimated taxes because we expect that we will have taxes to pay for 2011, and therefore not be eligible for the estimated tax exclusion in 2012 as we were in 2011. But, we expect to be making less money than we will be eligible to withhold based on the Foreign Earned Income Exclusion. Will we still need to pay estimated taxes even if all that money is eventually going to be excluded?

Question 6 How does one go about paying estimated taxes while living in a place overseas with no internet access or reliable postal service?

Thanks for any help or advice you may be able to provide!



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Old 07-13-2011, 05:07 AM
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Join Date: Oct 2010
Posts: 5,233
“Question 1 Based on the above information, is it true that I do not need to be paying estimated taxes?”--> As you said, you are an IC, a selfemployer, as you are filing as a sole proprietor and/or a self-employed individual, you generally have to make estimated tax payments if you expect to owe tax of $1,000 or more when you file your return; however,you do not have to pay estimated tax for the current year if you had no tax liability for the prior year: you were a U.S. citizen or resident for the whole year:your prior tax year covered a 12 month period.
Please visit the IRS Website here; Estimated Taxes
“Also, I am trying to understand "Foreign Earned Income."--->It depends; for 2011, you MAY elect to exclude up to $92,900 of earned income from a foreign country.To qualify, you MUST either reside in a foreign country for the entire year(from Jan1–Dec 31) or be physically present in a foreign country for 330 days during a 12-month period; you MUST meet the physical presence test. When you qualify for the FEIE, but reside in a foreign country onlypart of the year, then the exclusion must be prorated. What I mean is that if you reside in France for the last 210 days of 2010 and first 300 days in 2011, then you meet 330 days in a 12-month period requirement. Thus you qualify for the FEIE in each year; for instance, in 2010, you were in France for 210 days, then 210/365*$91,500=$52,644, in 2011, 300/3656*$92,900=$76,356. To claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, you must have foreign earned income, your tax home must be in a foreign country, and you must be a U.S. citizen who is a bona fide resident of a foreign country. You do not automatically acquire bona fide resident status merely by living in a foreign country or countries for 1 year.
Please visit IRS Websites here; Foreign Earned Income Exclusion
“Question 2 If I am living overseas while working, is my income "Foreign Earned Income" even if I am getting paid by a US based organization into a US based bank account?”-->No; as long as you have NO foreign earned income that you earn in a foreign country, you DO not pay tax(es) to the foreign taxing authority(ies). Then you do not qualify FEIE/ foreign housing exclusion(deduction)/ foreign tax credit on your US federal/state returns. To claim your foreign earned income exclusion, the foreign housing exclusion (if applicable), or the foreign housing deduction, 1) Your tax home must be in a foreign country.2)You must have foreign earned income.3) Also,you MUST be a U.S. citizen who is a bona fide resident of a foreign country / and 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 as said above.
“I am also reading about a Foreign Earned Income Exclusion. As I understand it, I can exempt ~$90,000 of income if I reside outside the USA for at least 330 calendar days during 12 consecutive months based on the physical presence test. I will meet this test, but the 12 months will fall roughly 1/3 in 2011 and 2/3 in 2012.”--> As said above.
“Question 3 Given the above: For which year do I take the Foreign Earned Income Exclusion if at all? How does this work?”As said above; assume that you reside in a foreign country for the last 130days of 2011 and the first 230 days, then as you pass the SPT test(360 days>330 days full days during a 12-month period) for example, then your FEIE(if I assume that you qualify it), then assuming the max. exclusion in both years is $92,900, the MAX exclusion MUST be prorated in both years; 2011:130/365*$92,900=$33,088, in 2012; 230/365*$92,900=$58,540.Your foreign earned income exclusion cannot exceed your foreign earned income.
“Finally, I got married in May 2011, which means that my wife and I will be filing jointly for the first time for our 2011 taxes. She will also be working overseas as a contractor for the same time period I will with the same organization. She will also not have to pay estimated taxes for this year (we think) based on the same exclusion I outlined above.”--> I guess so as long as you meet exclusion conditions as said above; however,as long as you have $400 or more of business income over and above your expenses, you need to file a Schedule C or C-EZ and a Schedule SE to pay self-employment tax( as long the amount on 1040 Sch SE line 2 is $400 or exceeds $400), even if you would not otherwise have enough income to be required to file a tax return. Even though as you are a U.S. person, the rules for filing income tax returns and paying estimated tax are generally the same whether you are in the United States or abroad. Your worldwide income is subject to U.S. income tax, regardless of where you reside; you are subject to taxes on your US source and world wide income that you earn overseas( if you have). Also as you reside overseas, you are allowed an automatic 2-month extension to file your return until June 15. However, any tax due must be paid by the original return due date (April 15) to avoid interest charges. you live in a foreign country, mail your U.S. tax return to;
Department of the Treasury
Internal Revenue Service Center
Austin, TX 73301-0215
USA
Estimated tax payments should be mailed with form 1040-ES to:
Internal Revenue Service
P.O. Box 1300
Charlotte, NC 28201-1300
USA
If your AGI level is $58,000 or less can electronically file their tax return for free using freefile;
Please visit the IRS Website here: Free File: Do Your Federal Taxes for Free
You can visit Dept of Revenue of your state for freefile for your state return.
Also The IRS Office in Philadelphia provides international tax assistance;Phone: 1 (267) 941-1000 (not toll-free):FAX:1 (267) 941-1055;Email: Email the IRS;
Mail: Internal Revenue Service
Philadelphia, Pa 19255-0725
If you are earning income and living overseas, there's a special form for you. The form to use depends on whether or not your income is excluded from taxation. To know whether or not you're exempt you must complete form 2555-EZ, "Foreign Earned Income Exclusion." If you are not exempt from paying and filing taxes you must complete Form 2555, Foreign Earned Income. So, you need to obtain a copy of Form 2555. You can get Form 2555 from the IRS website. If you don't have access to the Internet, call the IRS and request a copy of the form be mailed to you
“Question 4 How will getting married and/or filing jointly affect any of the above?”-->I guess it depends. I assume that your business is NOT joint ventures of married couples not treated as partnerships.If you If you formed an LLC, you cannot file two schedule Cs. You do NOT meet the rules for a "qualified joint venture." So,You MUST file a partnership form, 1065, I mean, issue yourself K-1s and use the k-1s to file the tax return.As long you are sole propriertors ,SMLLC, and do two separate Schedule Cs and then add the net income figures together before you go on to Schedule SE.Then youmust be subject to quarterly SE taxes and need to Sch C anf pay quarterly estimated taxes on your business income on Sch C( probably as your business tax exceeds $1,000). On a joint return, one or both spouse may be eligible for the exclusion. Each person has their own Form 2555. If only one spouse qualifies, that spouse claims the exclusion. This can be done a MFJ return. The only the qualified spouse can claim FEIE/ FTC( Form 1116 and report it on 1040 line 47 or on Sch A line 8) on the spouse’s federal and state returns;
“Question 5 Starting in January 2012 we expect to be liable for paying estimated taxes because we expect that we will have taxes to pay for 2011, and therefore not be eligible for the estimated tax exclusion in 2012 as we were in 2011. But, we expect to be making less money than we will be eligible to withhold based on the Foreign Earned Income Exclusion.
“ Will we still need to pay estimated taxes even if all that money is eventually going to be excluded?”-->Correct; you generally have to make estimated tax payments if you expect to owe tax of $1,000 or more when you file your return.
“Question 6 How does one go about paying estimated taxes while living in a place overseas with no internet access or reliable postal service?”-->As said above.
If you have more questions, please post two or three questions at a time. Thanks.



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