Understanding Form 673: Your Guide to Expat Tax Benefits
Okay, let’s talk about Form 673. It might sound complicated, but it’s really just a tool to help certain Americans living overseas reduce their U.S. tax bill. If you’re living and working abroad, this form could be your best friend. It’s specifically linked to something called Section 911 of the Internal Revenue Code – which is basically the part of the tax law that deals with people working overseas. Don’t worry, we’ll make it easy to understand.
Why Does Form 673 Exist?
Before we dive into the specifics of the form itself, let’s briefly touch on Section 911. The U.S. is one of the few countries that taxes its citizens on their worldwide income, no matter where they live. That means, even if you are living and working in another country, you might still owe taxes to the IRS. However, the U.S. government recognized that it wouldn’t be fair to tax people twice – once in the country where they live and work, and again back in the U.S. So, Section 911 was created to give some tax relief to Americans living abroad.
Form 673 is how you tell the IRS that you’re eligible for these tax breaks. It essentially acts as your “application” to claim the benefits of Section 911.
What Benefits Can You Claim Using Form 673?
Form 673 is primarily used to claim one or more of the following:
- Foreign Earned Income Exclusion (FEIE): This is the big one. If you qualify, you can exclude a certain amount of your foreign-earned income from U.S. taxes. This means that chunk of money you earned while working overseas won’t be taxed by the IRS. For 2023, this amount is a maximum exclusion of $120,000. This amount increases annually based on inflation.
- Housing Exclusion or Housing Deduction: This is designed to help offset your housing expenses while living abroad. If you’re employed, you can claim the housing exclusion, while if you’re self-employed, you may be able to claim the housing deduction. There are some complex calculations involved, but the basic idea is that you can deduct some of your rent, utilities, and other eligible housing expenses. There is a base amount that is not eligible for housing exclusion or deduction. The IRS defines this as a base housing amount that a taxpayer living in the United States would have.
- Foreign Tax Credit: While not claimed on Form 673, it’s important to understand that if you do not qualify for the FEIE and owe income taxes in the US, but you also paid taxes on this income to a foreign country, you can claim a foreign tax credit. This is done on a separate form (Form 1116) and can significantly reduce your U.S. tax liability by giving you credit for the taxes you already paid in a different country.
How Does Form 673 Work?
Form 673 isn’t something you file by itself. It’s used to help determine your eligibility for these benefits when filing your annual tax return (Form 1040). The information you provide on Form 673 will then be used to complete another form: Form 2555. Form 2555 is the form where you actually claim the foreign earned income exclusion or housing deduction/exclusion.
When you complete Form 673, you are basically stating, under penalty of perjury, that you meet certain tests to qualify for these exclusions. Here’s a breakdown of the key parts of the form:
- Personal Information: This includes your name, address, social security number, and filing status. Pretty standard stuff.
- Foreign Residence or Physical Presence Test: This is where you’ll choose whether you meet the requirements to claim the FEIE under either the “physical presence test” or the “bona fide residence test.”
- Physical Presence Test: If you spend at least 330 full days within a 12-month period in a foreign country, you meet this test.
- Bona Fide Residence Test: This is a bit more complex. You need to demonstrate that you have established a true residence in a foreign country, with intent to stay there for an extended time.
- Date of Arrival and Departure: You’ll need to list when you arrived in your current foreign country and when you might leave.
- Statement that you do not intend to return to the US: You will state that you do not have the intention to return to the US.
- Tax Home: You will need to show that your tax home is in a foreign country.
- Other Information: The form also asks for details about your foreign income, as well as any employer information.
Who Needs to File Form 673?
Form 673 is for U.S. citizens and resident aliens who meet both of the following:
- They have a tax home in a foreign country: This means their main place of business or work is outside the U.S.
- They meet either the physical presence test or the bona fide residence test: This proves that they have significant ties to a foreign country.
It’s important to remember that simply being outside of the U.S. doesn’t automatically qualify you for these exclusions. You must have ties to a foreign country and a tax home in that country.
When Do You File Form 673?
You don’t actually file Form 673 on its own. It’s a document you prepare to help you complete your tax return and the actual Form 2555. So, you’ll prepare it along with your other tax documents, like your Form 1040. You would need to complete this form in order to complete Form 2555.
Common Mistakes and Misconceptions About Form 673
- Thinking It’s a Standalone Form: As we’ve mentioned, Form 673 isn’t filed by itself, it is used to complete form 2555. It’s a worksheet to support your claim of foreign income exclusion, housing exclusion, or housing deduction.
- Misunderstanding the Physical Presence Test: The 330 days do not need to be consecutive and can be broken up over 12 months. You also don’t need to be in the same country for all of those days.
- Failing to Qualify: Not everyone who lives abroad qualifies for the FEIE. You need to meet either the bona fide residence test or the physical presence test to qualify.
- Incorrectly Determining Tax Home: The location of your tax home is based on your main place of business, not just where you reside. If you have an office in the US, even if you live abroad, you may be determined to have a tax home in the US.
Tips and Strategies for Filling Out Form 673
- Keep Detailed Records: Keep careful records of your travel dates, work locations, and housing expenses. This is very helpful for completing Form 673 accurately. You will need this information to show you meet either the physical presence or bona fide residency tests.
- Consult a Tax Professional: If you are unsure whether you qualify for the FEIE or how to complete Form 673, don’t hesitate to seek advice from a qualified tax professional who specializes in expat taxes.
- Use a Reliable Tax Software: There are many tax software programs available that will ask the right questions to help you determine your eligibility and ensure you are claiming everything you are entitled to.
- Don’t Wait Until the Last Minute: The taxes of expats are notoriously complex. By starting early, you can be sure you have all the necessary forms and documents completed in time.
Related Terms and Concepts
- Section 911 of the Internal Revenue Code: The section of tax law that provides tax benefits for Americans living abroad.
- Form 2555: The actual form used to claim the Foreign Earned Income Exclusion and Housing Exclusion or Deduction.
- Foreign Earned Income: Income earned while working in a foreign country.
- Tax Home: Your principal place of business, not necessarily where you live.
- Foreign Tax Credit: Reduces your US tax burden by giving you a credit for the taxes you already paid in a different country.
- Bona Fide Residence Test: Demonstrates a true residency in a foreign country.
- Physical Presence Test: Shows you spend a substantial amount of time in a foreign country.
Final Thoughts
Form 673 is an essential tool for US citizens and residents living abroad who want to claim the tax benefits offered under Section 911. By understanding how it works, who it applies to, and how to complete it correctly, you can potentially save a significant amount on your U.S. taxes. While tax rules can be confusing, a little bit of research and careful preparation can make a big difference. When in doubt, always seek advice from a tax expert.