This article was first published on February 22, 2012. It was updated on June 17, 2014, with information relevant to the 2013 and 2014 tax years.
Moving abroad in the middle of the year is not uncommon. If you think about it, no taxpayer is going to plan their move around the tax year. No matter the day you move abroad, moving in the middle of the year can have an impact on your US expat taxes. As you likely know from reading the other posts in our US Expat Taxes Explained series, US citizens who live abroad will likely qualify for the Foreign Earned Income Exclusion. US citizens who moved abroad during the middle of the year can extend the due date for their US expat taxes in order to meet one of these two tests and have a portion of their foreign earned income excluded for the year of the move.
US Expat Taxes: Foreign Earned Income Exclusion for Part-Year Residents
US citizens must report and pay taxes on all of their income to the US government on their annual US expat taxes. That being said, US citizens who live abroad are eligible to exclude a portion of their income by qualifying for the Foreign Earned Income Exclusion (FEIE). For 2013, this exclusion is capped at $97,600, and for 2014 it is capped at $99,200.
To qualify, a US taxpayer must meet one of two tests. They must meet either the Bona Fide Residence Test or the Physical Presence Test. When you first move abroad, taxpayers will generally qualify under the Physical Presence Test. To qualify for this test, you must live abroad for at least 330 days out of a 365-day period. This 365-day period does not need to be the calendar year in which you moved abroad. The period can be any period leading up to the filing of your tax return. In fact, US taxpayers living abroad can easily extend their tax return until October 15th to help them meet this test.
However, it is important to keep in mind that the amount of foreign income a taxpayer is eligible to exclude will be prorated. This is calculated based on the number of days in the calendar year that he or she was physically present in a foreign country. We will explain this more in our example below. As the name implies, the Foreign Earned Income Exclusion is only available for foreign earned income. You cannot use the this exclusion to exclude any US sourced income.
Once you have moved abroad and established permanent residence for a full tax year, you will then qualify for the Bona Fide Resident Test. The Bona Fide Resident Test qualifies individuals to exclude the full $95,100 exclusion for 2012 and the $97,600 exclusion for 2013.
State Tax Impact
States differ from the federal government in that they generally only tax income that is earned in their particular state. This means that income excluded under the Foreign Earned Income Exclusion will also be excluded from state taxes. However, during the year of expatriation, you will likely be required to file a Nonresident or Part-Year Resident state tax return. It is very important to use the appropriate state forms in order to report your move abroad to the state. Please see the example below for further explanation.
US Expat Tax Mid-Year Move Example
[This example reflects the Foreign Earned Income Exclusion cap for the 2011 tax year, which was $92,900.]
Joe Expat, a married man with two children and a lifelong California resident, decided to fulfill his lifelong dream of moving to Germany. By May 31, 2011, the kids were out of school and they were on the plane to Munich. During the time prior to his move abroad, he worked for a US company and earned a monthly salary of $4,000. After moving to Germany, it took Joe about two months to find employment. At that time, he began earning a monthly salary equivalent to $3,000. In summary, he earned $20,000 before his move abroad and $15,000 after his move abroad.
Because of his permanent residence abroad, Joe will now qualify for an automatic extension of his US expat taxes until June 15, 2012. Waiting this length of time will allow him to claim a portion the Foreign Earned Income Exclusion on his 2011 US expat taxes. The period that will allow Joe will use to qualify for the Physical Presence Test is June 1, 2011 through May 31, 2011.
Because he was only physically present in a foreign country for a portion of his 2011 tax year, the amount of foreign income excluded on his 2011 US expat taxes will be prorated.
Therefore, he will be able to exclude the entire $15,000 that he earned while living abroad. He will still be required to pay Federal and Californian taxes on the $20,000 he earned while still living in the US.
In 2010, Joe fulfilled his US taxes by filing Form 1040 and California Form 540 (for his Californian return). When he files his 2011 US expat taxes, he will continue to file Form 1040. However, because he only lived in California for part of the year, he will now file Form 540NR for his non-resident California return. Because he sold his property and severed all ties to California when he moved in 2011, he will not need to file in California when filing his 2012 US expat taxes.
Extension to Claim Foreign Earned Income Exclusion
As mentioned above, the IRS automatically gives expats a two-month extension to file their taxes. If even more time is needed, US taxpayers living abroad can file Form 4868 to request an additional extension to file their US expat taxes until October 15th. This extension is automatically granted unless otherwise told by the IRS. If you find that you need additional time beyond October 15th to meet the Physical Presence Test, you can request an additional two-month extension by writing a letter to the IRS explaining why you need additional time.
It is important to remember that the extension on the date to file is not an extension of the date you will need to pay. All of the required US expat tax payments are still due to the IRS by the original due date. If you extend your tax return due date, you will need to estimate your tax liability to ensure you have fully paid by the original tax due date in each year.