Just tell me what I owe

February 20, 2009 2:19 PM

TaxFilter, specifically Department of Part-time Expatriate Freelance Taxation. A thorn in my side, inside.

Hello everyone. I am a US citizen who moved to Germany in June of last year. I plan to continue living here for the foreseeable future.

While I have not resided here for a full year, my reading of the IRS forms suggests that Germany is my tax home based on the "Physical Presence" test (data dump below). So:

-I should submit Form 1040 using my current address in Germany.

-I should also file as a part-time resident of the state of New York, where I lived for the first half of 2008.

Here is where things get complicated.

1) How do I file and report on income I earned in the US for the first half of 2008? The only things I can find on the IRS website pertain to non-citizens who worked in the US. There doesn't seem to be a form for part-time residents of the US who are American citizens (ie, only for "non-resident aliens."

2) I'm a freelancer, and after my move to Germany I continued to earn my income from companies in the US (note: I only have income from US companies).

My clients are preparing W-9s for me (IRS form W-8, which was the form for foreign freelancers, seems to no longer exist). Since I've worked for some of these companies over the course of the entire year, their W9s will show my cumulative income, rather than what was earned in the first half vs the second half of the year. How do I show the IRS which amount was earned when so I will only pay US taxes on the income I earned while I was in the US?

Or do I have this all wrong?

Thanks, veteran expatriates and tax ninjas, for your help.

Criteria for meeting the "Physical Presence Test" to claim a tax home abroad:

"Physical Presence Test":

"I expect to be present in and maintain my tax home in (foreign country or countries) for a 12-month period that includes the entire tax year . Or, if not the entire year, for the part of the tax year beginning on , 20 , and ending on , 20 . Based on the facts in my case, I have good reason to believe that for this period of presence in a foreign country or countries, I will satisfy the tax home and the 330 full-day requirements within a 12-month period under section 911(d)(1)(B)."

posted by foxy_hedgehog to work & money (9 comments total)

I think that if anything, you'd be sending a W-9 to your clients, not the other way around. Your (US) clients should be sending 1099s to you, to cover the work you did for them during your time in the USA. You may need to talk to your clients' bookkeepers about this: if they are filling out 1099s showing the full amount you billed them for the year, there's going to be an ugly discrepancy.

For your time in Germany, I don't think they're obliged to send a 1099.

I get out of my depth here, but the IRS has separate slots for the income you made while living in the US and the income you made while living abroad (form 2555). You report the appropriate numbers in each, based on your own bookkeeping.
posted by adamrice at 2:50 PM on February 20 [1 favorite has favorites]

Oops! SO sorry, I meant to say they are filing 1099s for me, not W9s. Sorry for that confusing error.

So then a crucial question is: do they report income on my 1099 for work I did for them after I moved? Sorry to add more to the mix...
posted by foxy_hedgehog at 2:56 PM on February 20

Not sure if I'm being helpful or not, but hiring an accountant at this point might be worth the investment, just to make sure this doesn't get screwed up.
posted by toaster at 7:00 PM on February 20

You might want to look at one of these companies:

www.overseastaxservices.com
www.expatriatetaxservices.com
www.expatcpa.com

I've never used them before, but they appear to be worth contacting for more information.

Good Luck!
posted by Fiat124 at 12:07 PM on February 21 [1 favorite has favorites]

Disclaimers: I moved to Europe partway through the year, so I am also new to all the filing issues. I am not an accountant. You might find that it's best to hire one. Sorry if you already have all of this information.

Read IRS Publication 54. To the best of my (limited) knowledge, the quote you have about the physical presence test is only meant to apply to withholding taxes and paying estimated taxes during the year. When you file your taxes, if you want the foreign income exclusion, you must actually meet the physical presence test, not just have a reasonable expectation that you will. I moved here in September so I will be filing a special extension (form 2350) that allows me to file my taxes once I've met the physical presence test (once I've been here for 330 days within a 365 day period). I still have to figure out what I owe and pay it by April 15, but this way I can wait to file until I meet the test and can therefore claim the exclusion.

I will be reporting all of my income on form 1040 and then deducting what I am allowed by using form 2555 and 2555EZ. As far as I know there is no special part-year resident form for citizens- the US claims you for the whole year unless you qualify for the exclusion, for which there is a separate form (2555 and 2555EZ). I think there is a worksheet on page 37 of the 1040 instructions that will help you do your calculations. You don't say how you're being taxed in Germany, but keep in mind that you may still owe self-employment taxes to the US on the income you earned while living there, unless you've been paying some comparable tax in Germany in which case I think you need to submit proof of this taxation with your return (see Pub. 54 sections 2 & 3). Also keep in mind that there is a limit on how much income you can exclude, and it is prorated based on how long you were living abroad during 2008. I have no answer to your question about the 1099s from your clients.

Here is a link to the IRS page about the foreign earned income exclusion

Here is where you can find information about filing Form 2350 for the extension

I hope some of this was helpful. Sorry if it's not clear; it is a complex subject, and I agree with previous posters that if you are unsure about anything it might be worth it to hire a tax professional so you don't mess up. Good luck!
posted by lomes at 9:12 AM on February 22

Lomes, that was extremely helpful- I'd read form 54 but it still left me in a muddle. It hadn't even occurred to me to use the extension to qualify for "physical presence."

Thanks so much!
posted by foxy_hedgehog at 1:05 AM on February 23

Hey- one caveat- I wanted to add that this:

"I moved here in September so I will be filing a special extension (form 2350) that allows me to file my taxes once I've met the physical presence test (once I've been here for 330 days within a 365 day period). I still have to figure out what I owe and pay it by April 15, but this way I can wait to file until I meet the test and can therefore claim the exclusion."

sounds fishy and worth checking into. You're not paying taxes on what you earned from June to June; you're paying taxes based on where you were and for how long during the calendar year of 2008. You might be right, which would be great, but this seems like something you might want to get more info on. I just emailed an accountant and will share his answer with you when I receive it.
posted by foxy_hedgehog at 1:19 AM on February 23

Yes, I understand that you aren't paying taxes on what you earned June to June. The 12 month period you use to show that you meet the physical presence test is a qualifier, to prove to the IRS that you are staying in your country of residence for more than a short term period. The extension allows you to wait to file until you can prove via the physical presence test that you are more than a short-term resident abroad. Then you can go back and file for 2008, because your 2008 months in Germany are part of a 12 month period spent in Germany...doesn't matter that that period spans two tax years.

When you fill out the 2555 and 2555-EZ, it will ask you what your 12 month period is, and you will say June 1, 2008-June 1, 2009 (or whatever date was your first full 24 hour day in Germany). It will then ask you how many days out of that 12 month period fall within 2008. Then based on that number, you can calculate your maximum exclusion ($87,600, prorated for the number of days you were in Germany in 2008). There is a section in Pub 54 with some examples and a much more complicated way of calculating this.

Pub 54 states that you could go ahead and file on time, and then amend your return with a 1040X once you've met the physical presence test. But if you do it that way you'll have to pay taxes on your foreign earned income when you file, and then wait for a refund on those taxes after you amend the return to show that you qualify for the exclusion.

Keep in mind that you still have to calculate what you will owe once you do file your 2008 taxes and pay this amount to the IRS by the regular April 15 deadline. Extensions are for filing your paperwork, not for payment. If for some reason the IRS decides you do not qualify for the exclusion, you may be charged penalties and interest for the difference between what you paid on time and what they think you owe.

Whew. That was long. Sorry for the drawn out explanation, I can't seem to come up with something succinct that really explains it well...maybe that's why all those IRS publications are so long. Glad you've got an accountant to answer your questions- this is definitely stuff you want to understand and be sure about so you don't have to wonder if that crazy person on the internet had their facts straight.

Happy Filing!
posted by lomes at 2:11 AM on February 24

Yes, I understand that you aren't paying taxes on what you earned June to June. The 12 month period you use to show that you meet the physical presence test is a qualifier, to prove to the IRS that you are staying in your country of residence for more than a short term period. The extension allows you to wait to file until you can prove via the physical presence test that you are more than a short-term resident abroad. Then you can go back and file for 2008, because your 2008 months in Germany are part of a 12 month period spent in Germany...doesn't matter that that period spans two tax years.

Opps! I can be a bit thick about these things. I understand- thanks so much for your detailed and helpful explanation.
posted by foxy_hedgehog at 12:05 PM on February 24