US citizens living abroad may exclude up to $76,000 of foreign-earned income for the 2000 tax year.

Many were disillusioned by the aftermath of the 2000 presidential elections. As absentee ballots were either tallied or tossed, expatriates began to wonder whether their country had forgotten about them. But fear not, for April showers shall wash away your doubts as they leave tax forms and depleted bank accounts in their wakes.

Whether or not your vote was, you can de sure your taxes will be. "A lot of people overseas kind of forget they have to file a US return," says Tim Linneman, president of Denver-based Relocation Tax Services, LLC, which specializes in tax issues for US citizens living abroad. "As long as you're a US citizen, you have to file."

What's Different About Filing as an Expat?

The main difference between filing when you live in another country and when you live in the US is that when you live in another country, you can claim a foreign-earned income exclusion and a foreign housing exclusion or deduction. This means extra paperwork, but it also means your taxes can be significantly reduced or even eliminated if you qualify.

Basically, US citizens living abroad may exclude up to $76,000 of foreign-earned income for the 2000 tax year. The exclusion will increase to $78,000 for the 2001 tax year and $80,000 for the 2002 tax year. But in order to claim this exclusion, you must meet several requirements.

First of all, you must have a foreign income and a tax home in another country. In addition, you must either be a bona fide resident of another country for an uninterrupted period of time that includes an entire tax year or meet the physical presence test.

What Is Foreign-Earned Income?

Foreign-earned income is any money you make for work you do in another country. Even if you're getting paid in dollars by an American company, it counts as foreign income provided you do the work in another country. There is one exception: Income received from the United States cannot be counted as foreign, even if the work is performed in another country. Also, money earned from United States dividends and interest in foreign bank accounts cannot be claimed as foreign-earned income.

Tax Home, Bona Fide Residency and the Physical Presence Test

In order to qualify for the foreign-earned income exclusion and foreign housing exclusion or deduction, you must have your tax home in another country. Your tax home is your main place of business, the place where you are permanently or indefinitely based. It isn't necessarily your current abode.

In addition to having your tax home in another country, you must be either a bona fide resident of another country, or you must pass the physical presence test. Bona fide residency is a somewhat nebulous concept, in that it describes a state of mind, rather than bureaucracy. If you go to another country planning to set up shop, you're a bona fide resident. Even if you plan to return to the States eventually, you can still be a bona fide resident of another country.

The physical presence test is fairly straightforward. In order to pass the physical presence test, you must be present in another country or countries for at least 330 days during a 12-month period.

For more information about whether you qualify for the foreign earned income exclusion, see IRS Topic 854, "Foreign Earned Income Exclusion-Who Qualifies?".

The Automatic Extension and the IRS Goes Retro

If you are either a bona fide resident or you pass the physical presence test, you are granted an automatic extension until June 15 to file your return. This is an extension of time, however, not of payment, so you will be charged interest on any balance that is due.

If you're wondering what to do with all your free time now that you have an extra two months to file your return, why not check out the IRS Web site? It's full of fun activities like the Braintaxer, an online game show. You can get all the information you need to play by studying up on the IRS's "Digital Daily." If you get everything right, you win a downloadable "Cloud Nine" award certificate.

Or take the extra two months to contemplate why the IRS Web site has embraced the '50s aesthetic? Should we take comfort in the site's entertaining accessibility?

2555 Forms

If you qualify for the foreign income exclusion and foreign housing exclusion or foreign housing deduction, you will need to fill out either Form 2555 or Form 2555-EZ. Form 2555-EZ, as the name implies, is easier than Form 2555. You can use the EZ form if your total foreign-earned income is less than $76,000 and you are not claiming a foreign housing exclusion or deduction. Forms 2555 and 2555-EZ should be used in addition to, not instead of, Form 1040.

Converting Foreign Currency

All foreign-earned income must be reported in dollars, even if you are paid in another currency. You should use the average exchange rate of the period of time you are reporting. The Federal Reserve Board lists foreign exchange rates on its Web site on a daily, weekly, monthly and yearly basis.

More Information

For an in-depth guide to issues related to taxes and working abroad, see IRS Publication 54, "Tax Guide for US Citizens and Resident Aliens Abroad". The 43-page guide covers moving expenses and the purpose of tax treaties. The IRS also offers special help to citizens living abroad with IRS staff stationed at some US embassies. For details, see "Taxpayer Help and Education."