Gary Bode, CPA: Form 673 estimates your expected Form 2555. (910) 399-2705.
Expat CPAs sometimes deal with adverse consequences of IRS tax Form 673, Statement for Claiming Exemption from Withholding on Foreign Earned Income Eligible for the Exclusion(s) Provided by Section 911. What a title! An analogous form might be the more familiar employment W-4, Employee’s Withholding Allowance Certificate. Tax Form 673 allows your employer to not withhold federal income tax from wages you earn while working abroad. Note that Form 673 doesn’t apply to Medicare and Social Security tax withholding. But since the 2013 foreign earned income exclusion is $96,700, the federal income tax alone can be $20,000+.
“Form 673 is just a prelude to filing tax Form 2555.”
- Gary Bode, expat tax CPA
Tax Form 673 and Form 2555 Cycle:
- You decide to work abroad.
- You present tax Form 673 to your employer.
- Your employer does not withhold federal income on some or all of your wages earned abroad.
- At tax time your expat CPA prepares Form 2555.
- Form 2555 calculates how much of your foreign earned wages qualify for exclusion from IRS taxable income. And of course, it includes the foreign housing credit too, if any.
- Your CPA includes your foreign earned wages on Line 7 of Form 1040.
- The foreign earned income exclusion shows as a negative number on line 21 of Form 1040.
Tax Form 673 Consequences:
- You under-estimate your exclusion on form 673. Your employer withholds too much federal tax. Your tax Form 2555 and Form 1040 shows a refund.
- Your Form 673 over estimates the tax Form 2555 foreign earned income exclusion. Let’s say no federal income tax was with held on $91,500. At tax time you don’t qualify for any foreign income exclusion for some reason. You’re on the hook for thousands of tax dollars. This starts a long-term cash flow problem that incurs penalties and interest.
Form 673, Part 1, Bona Fide Residence Test
The IRS determines whether you have a bona fide residence in a foreign country from info you provide on Form 2555. Which you file after Form 673. So, it pays to understand what they look for on Form 2555 proactively. You must expect your foreign residence to be long-term. The Bona Fide Residence Test for Form 673 requires you live in the foreign country for an entire tax year, interrupted by only infrequent return visits to US.
Form 673, Part 1, Physical Presence Test
Here you expect to be in foreign countries 330 full days in a consecutive 12 month period. This doesn’t have to your tax year. This test does not depend on the kind of residence you set up, your intentions about returning, or the nature and purpose of your stay abroad.
Form 673, Part II, Estimated Housing Cost Amount for Foreign Housing Exclusion
In addition to the Foreign Earned Income Exclusion, you may qualify to exclude amounts paid for foreign housing on your behalf. So here’s another estimated calculation.
Form 673, Part III, Certification
You have to sign Form 673 of course which attests you understand the stipulations required. This means the IRS can impose penalties if you miscalculate your exclusion on Form 2555.
Form 2555
Click on 2555 from the drop down Forms box in our right sidebar for more info.
I’m an expat CPA with a virtual office to facilitate long distance clients. If you need a free initial consult on Form 673 or Form 2555, please contact us at (910) 300-2705.
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What is the Employer’s obligation and/or compliance when accepting form 673? With the exclusion limit for 2011 being $92,900, can (must) the employer begin withholding once that taxable wage amount has been met?
Well Lisa, remember your employer still with holds Medicare and Social Security (up to the annual limit). Employers can be made responsible for YOUR income tax if they don’t with hold properly after you exceed the base. But I’ve never seen that happen. So, if I was doing the payroll, there would be federal with holding after your salary exceeded the base. There can be under payment penalties assessed on you too, but most folks don’t seem to mind these, within a relevant range of course. If I was receiving a salary under your conditions, I’d stay on top of earnings and insure with holding is reinstated after the base. Hope that helps.
How can one make a company RESPONSIBLE for my income tax, if they continue to not withold after the employee has gone above the exclusion limit? (please reply to my email address)
DESCRIPTION: I am an overseas contractor and switched hats (company bought out) mid-2011. My housing allowance stayed the same and still given in a lump sum once a year. In OCT 2011, I completed my annual lease (covered by the company), but the allowance was not factored in my 2011 W2′s. Just before April (taxes), I was garnished FICA (soc. sec. & medicare) for the housing allowance with 24 hr notice. In OCT 2012, I renewed my lease, but had to arrange FICA payments on the housing amount before funds were released and this time the housing depicted on my pay stub.
QUESTIONs:
-Is there there any law or regulation on taxation (FICA) of a benefit like housing allowance?
-On part II of Form 673, line 7 has my total allowance (less than State Department’s rate for this location). I believe I read on your forum that line 8 (Estimated Base Housing) is 16% of the annual foreign exclusion limit ($95,100 for 2012) covering only $15,216, which is about half of the State Department housing allowance rate for this location. Does this mean I can only exclude $15,216 from my income even though the allowance is higher and yet still under State Dept?
-Basically, is line 8 of Part II Form 673 in fact $15,216 for 2012 and therefore line 9 illustrating the estitmated housing cost to me that will not be an exclusion?
Thank you so much in advance! Your site alone has given relief that there is someone like you out there. Pending your response, I have quite a few people out here that would be very interested in giving you a call for legal, expat guidance. Hopefully I’ll hear back from you soon!
Mike
I’ll be working in the UK for 41 months beginning this Aug (2013). For Part II of Form 673, do I use annual amounts, pro rata amounts for partial 2013, or total amounts for the full 41 months?
Hi John, good question. Partial for 2013. Full 12 months for 2014. Hope that helps.
Confused. There don’t seem to be alot of CPA’s in our area that are familiar with this form 673 or want to fool with foreign tax situations. Husband deploys as a civilian medic to Afghanistan in 4 days, August 4th 2013. Contract is for 1 year exactly. (Aug 4, 2013-Aug 4, 2014) We got the form 673 to return to his employer. Salary is an even 100K. The tax year 2013 exclusion is $96,700. The way we read this form, the Physical Presence Test seems to be the one to choose since the 12 month period will be split between 2013 and 2014. (1)Would this be the correct choice? (2)What do we plug into the 2 dates required in that section? It seems common sense as to that answer, but just checking!! (3)Is this form good for the entire 12 months? (4)Are our Indiana state taxes, SS and Medicare still taken out as usual? (5)When paid, how will the federal tax witholding line read? In other words, a very small amount or a large amount based on his earnings then the reimbursed exemption by tax refund early next year? Section II of the form will not be used. You are our only QUICK hope for answers! Thank you, Sir.
Well Karen most CPAs don’t handle expat tax issues. Form 673 is an annual requirement, probably more for employer protection. Physical presence test is correct. First day of employment to 12/31. You’re correct, other taxes will still be with held, only the federal tax passes along to the employee every paycheck. I don’t understand the last part of the question, sorry. Remember Form 2555 has pitfalls.
We may just call for a free consult. When are the hours you are available for this? There is too much to write and inquire about! Thank you immensely!
Hi. I have a question on Part 2 on form 673. I have recently shifted from a “full expat” status to a “resident expat” status at an overseas job., which means my employer is no longer providing any overseas housing benefits or allowances. I now pay these costs from my regular salary, just as I would if I lived in the US. Do I need to fill out Part 2?
Hi Elizabeth: Filling out part 2 allows your employer to with hold less federal tax from your paychecks. I think it’s a question of increased net pay or bigger refund when you file. I hope that helps.
I will be moving to the KSA in about 1.5 weeks for the next 2 years and I will use the physical presence test for the 673, will I still be responsible for MD state taxes?
Hi: if you’ve established a residence in a State that requires an income tax return it’s possible they’d tax some of that. Generally States follow the Federal tax return so IRS Form 2555 flows through to them as well. Best planning perhaps is to establish residency in a non income tax State like FL or Tx. Hope that helped.
Began military contract job 10Oct13, due to end june2014. Still having taxes taken out. Should I do the 673form or wait and do 2555form with 1040.
Hi Keith. It depends. If you want the improved cash flow now, I’d submit IRS tax Form 673. If you’re a Christmas Club kind of guy, don’t file Form 673 and get a nice refund.
Thought this my help show the regulations for the Physical Presence Test. My employer was giving me issues and I had to prove it with IRS info.
“The physical presence test is based only on how long you stay in a foreign country or countries. This test does not depend on the kind of residence you establish, your intentions about returning, or the nature and purpose of your stay abroad.”
“You meet the physical presence test if you are physically present in a foreign country or countries 330 full days during a period of 12 consecutive months. The 330 days do not have to be consecutive. Any U.S. citizen or resident alien can use the physical presence test to qualify for the exclusions and the deduction.”
“Form 673 - Reduce Your Withholding”
-Your employer is not required to withhold U.S. income tax from the portion of your wages earned abroad that is equal to the foreign earned income exclusion and foreign housing exclusion if your employer has good reason to believe that you will qualify for these exclusions.
-You can give a statement to your employer indicating that you will meet either the bona fide residence test or the physical presence test and indicating your estimated housing cost exclusion.
-Form 673, Statement for Claiming Exemption From Withholding on Foreign Earned Income Eligible for the Exclusions Provided by Section 911, is an acceptable statement.
-You can use Form 673 only if you are a U.S. citizen. Resident aliens are not allowed to file Form 673. You do not have to use the form.
-You can prepare your own statement. Give the statement to your employer and not to the IRS. For additional information, refer to the Income Tax Withholding section in Chapter 2 of Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad.
References:
-Physical Presence Test: http://www.irs.gov/Individuals/International-Taxpayers/Foreign-Earned-Income-Exclusion—Physical-Presence-Test
-IRS Pub on this matter: http://www.irs.gov/publications/p54/ch04
-Which form to file 673: (http://www.irs.gov/Individuals/International-Taxpayers/Foreign-Earned-Income-Exclusion—Which-Form-to-File)
Also I wanted to say thank you for the provided information. This helped me a ton!
Good Sam, thanks for the feedback.