US expat tax - do we still have to pay full tax since we arrive in October?

Question

Hi,

my husband (United States citizen) and I (greencard holder) are moving to the United Arab Emirates. We will move there in October. I have a question: Will we still have to pay full tax for the time in this year we are living abroad, or do we only have to pay expat tax (since we will stay there a consecutive 12 months and more). Furthermore my husband was working in August and September for his old American company but also for the new one in the United Arab Emirates. Does he have to pay full tax on the amount received in August and September from the foreign company?

Thank you.

Answer 1

Yes he'll have to pay full tax on the amount received for the whole year.  You have to be out of the country for the consecutive number of days (321?) before you qualify for the overseas tax allowance.  So you'll get the deduction for income earned in 2009 (assuming you stay out for the required number of days).

Answer 2

In tax lingo, you are NOT expats.  Unless your husband gives up his citizenship, he is not an expat, merely that you are US Citizens/Resident Aliens living abroad.  Please read IRS publication 54.

As US persons, first you report worldwide income, then you exclude whatever you can.  You don't just simply drop the income from the return.

Publication 54 addresses the form 2555.  You can't use it until you have actually been in UAE for your 330 days.  While you can count October to October, the IRS will prorate the amounts for October to December 31st.  (If the work for the UAE in August and September was physically done in the USA, it doesn't count as foreign earned income.)

You can either:

1) File without the form and amend later.

2) Use form 2350 to get the longest extension possible (30 days past the date you expect to hit the 330 days), then file with the form.

Please note, the excluded income will reduce your tax only slightly for 2008.  You will be dropping the income that was taxed at 10% and keeping the income that is taxed at the higher tax brackets.