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Gary Bode, CPA is a Master's Degreed, nation wide accountant offering tax and business services. Member of AICPA and NCACPA. Our virtual office provides excellent service to long distance and international clients. Call (910) 399-2705 for a free phone consult.

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Gary,

I would like to thank you for your time in helping me with this issue of tackling the exclusion of my 1099-C income from this years taxes. The Form 982 that the IRS makes you file is very confusing and makes you want to beat you into submission however with your guidance I was able to quickly and easily get through it and on top of that exclude 100% of the cancellation. I will suggest your site and assistance to anyone and everyone.

Sincerely,

Keith, CPA from CT

Keith

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ExPat CPA discusses IRS Form 673 for 2014 | Foreign Earned Income Eligible for Exclusion | Form 2555

ExPat CPA Form 673 Form 2555

Gary Bode, CPA: most ExPats prepare their own Form 673. This post just presents some typical issues. (910) 399-2705.

ExPat CPAs sometimes help employees and employers with IRS Form 673, Statement for Claiming Exemption from Withholding on Foreign Earned Income Eligible for the Exclusion(s) Provided by Section 911.  What a name. But most ExPat clients prepare Form 673 themselves. Or perhaps with help from their employer. I suggest gaining an understanding of IRS Form 2555, Foreign Earned Income, as part of the process. This post presents some issues that generally factor into Form 673 preparation for 2014. Other sources of help for Form 673 and Form 2555 include:

  • The Form 673 instructions.
  • IRS Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad.
  • The Form 2555 instructions.

What is IRS Form 673, Statement for Claiming Exemption From Withholding on Foreign Earned Income Eligible for the Exclusion(s) provided by Section 911?

It’s similar to the IRS W-4 required from employees working in the US, which helps employers calculate how much federal tax to withhold. You’re sort of estimating how much of your expat wages Form 2555, Foreign Earned Income, will exclude from taxable income when you file your tax return.

Form 673 allows ExPats to not have federal tax withheld on wages (and/or a housing allowance) paid to them while working in a foreign country.

Form 2555 Basics to help Understand Form 673 for 2014

You file Form 2555, Foreign Earned Income, with your Form 1040. Your foreign wages count as income. But then you can exclude them from income using Form 2555. The 2014 maximum exclusion for foreign earned income on Form 2555 is $99,200. Form 2555 may allow you to exclude costs of foreign housing as well. Lots of IRS wrinkles exist in Form 2555 and it pays to do your homework before presenting your ExPat employer a Form 673. The instructions for Form 2555 and IRS Publication 54 are a good place to start. For ExPat clients, we sometimes extrapolate the next tax return using all known information. There are non Form 2555 planning parameters too e.g. the exemption(s) and standard deduction of Form 1040 increase the amount of any wage or business income that’s tax-free.

“IRS Form 673 reflects the criteria required for the subsequent Form 2555.” 
– Gary Bode, ExPat CPA

We have many Expat posts on this website. Please find them through the Forms or Category drop boxes in the right sidebar. But here are two to start with:

  • Here’s a post on Form 673 specifics.
  • Here’s one of our many posts on Form 2555 preparation.

What Happens if you Mis-Calculate Form 673?

If an ExPat employer withholds too much federal tax on your paychecks, the ExPat employee gets tax refund when they File Form 1040 (which includes Form 2555 as an attachment). Many clients prefer to have a refund so they don’t try to max out Form 673. Why? They don’t want to get hit with a tax bill and penalties.

If an ExPat employer withholds too little federal tax, the Expat employee pays the deficient tax amount, and penalties, with their next tax return. Sometimes ExPats can use the money not withheld by their employer to make investments that exceed the under-payment penalty. But underestimating your federal tax obligation often results in a cash flow problem.

I’m an ExPat CPA with a virtual office to serve international and long distance clients. Sometimes we consult on Form 673, especially for the first Expat tax year. Our services include preparing Form 2555, Form 5471, Form 1116 and OVDI applications. For a free phone consult call (910) 399-2705.

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4 comments to ExPat CPA discusses IRS Form 673 for 2014 | Foreign Earned Income Eligible for Exclusion | Form 2555

  • ESW

    Hello Gary – Thank you for all the helpful info on your website. I have one more question regarding the 673. You mentioned that a client can try NOT to max out the Form 673. How does one do that? It does not look like there is an option to choose what portion of your income is taxed. Thank you!

  • Kevin

    Gary,
    What happens if my base pay exceeds the maximum limitation of 99,200? Say I earn 120,000 for example. Am I going to pay taxes on the entire 120,000 or on 19,800 (exceeded amount)?
    Thanks!

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