IRS Releases Publication 516 (9/2015), U.S. Government Civilian Employees Stationed Abroad

Future Developments

For the latest information about developments related to Publication 516, such as treaties effective after it was published, go to http://www.irs.gov/pub516.

Reminders

Combat zone participants. If you were a civilian who served in a combat zone or qualified hazardous duty area in support of the U.S. Armed Forces, you can get certain extensions of deadlines for filing tax returns, paying taxes, filing claims for refund, and doing certain other tax-related acts. For details, see Publication 3, Armed Forces' Tax Guide.

Death due to terrorist or military action. U.S. income taxes are forgiven for a U.S. Government civilian employee who dies as a result of wounds or injuries incurred while employed by the U.S. Government. The wounds or injuries must have been caused by terrorist or military action directed against the United States or its allies. The taxes are forgiven for the deceased employee's tax years beginning with the year immediately before the year in which the wounds or injury occurred and ending with the year of death.

If the deceased government employee and the employee's spouse filed a joint return, only the decedent's part of the joint tax liability is forgiven.

For additional details, see Publication 559, Survivors, Executors, and Administrators.

Form 8938. If you have or had foreign financial assets, you may have to file Form 8938 with your return. See Foreign Bank Accounts, later.

Introduction

If you are a U.S. citizen working for the U.S. Government, including the foreign service, and you are stationed abroad, your income tax filing requirements are generally the same as those for citizens and residents living in the United States. You are taxed on your worldwide income, even though you live and work abroad.

However, you may receive certain allowances and have certain expenses that you generally do not have while living in the United States. This publication explains:

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Useful Items

You may want to see:

Publication

See How To Get Tax Help in the instructions for your income tax return for information about getting the publications and forms, listed earlier. You can also get tax assistance through the Internet or your smart phone. IRS.gov and IRS2Go are ready when you are -- 24 hours a day, 7 days a week.

U.S. Tax Return

Filing Information

If you are a U.S. citizen or green card holder living or traveling outside the United States, you are generally required to file income tax returns in the same way as those residing in the United States. However, the special rules explained in the following discussions may apply to you. See also Tax Treaty Benefits, later.

When To File and Pay

Most individual tax returns cover a calendar year, January through December. The regular due date for these tax returns is April 15 of the following year. If April 15 falls on a Saturday, Sunday, or legal holiday, your tax return is considered timely filed if it is filed by the next business day that is not a Saturday, Sunday, or legal holiday. If you get an extension, you are allowed additional time to file and, in some circumstances, pay your tax. You must pay interest on any tax not paid by the regular due date.

Your return is considered filed on time if it is mailed from and officially postmarked in a foreign country on or before the due date (including extensions), or given to a designated international private delivery service before midnight of the last date prescribed for filing. See your tax form instructions for a list of private delivery services that have been designated by the IRS to meet this "timely mailing as timely filing/paying" rule for tax returns and payments.

If your return is filed late, the postmark or delivery service date does not determine the date of filing. In that case, your return is considered filed when it is received by the IRS.

Extensions

You may be able to get an extension of time to file your return and pay your tax.

Automatic 2-month extension. You can get an automatic 2-month extension (to June 15, for a calendar year return) to file your return and pay your tax if you are a U.S. citizen or resident and, on the regular due date of your return, you are living outside the United States and Puerto Rico and your main place of business or post of duty is outside the United States and Puerto Rico. To get this extension, you must attach a statement to your return explaining how you qualified. You will owe interest on any tax not paid by the regular due date of your return.

Married taxpayers. If you file a joint return, either you or your spouse can qualify for the automatic extension. If you and your spouse file separate returns, the extension applies only to the spouse who qualifies.

Additional extension. You can apply for an additional extension of time to file your return by filing Form 4868. You must file Form 4868 by the due date for your income tax return.

Generally, you must file it by April 15. However, if you qualify for the automatic 2-month extension, you generally must file Form 4868 by June 15. Check the box on line 8 of Form 4868.

Payment of tax. You should estimate and pay any additional tax you owe when you file Form 4868 to avoid being charged a late-payment penalty. The late-payment penalty applies if, through withholding, etc., you paid less than 90% of your actual tax liability by the original due date of your income tax return. Even if the late-payment penalty does not apply, you will be charged interest on any unpaid tax liability from the original due date of the return until the tax is paid.

Electronic filing. You can file for the additional extension by phone, using your home computer, or through a tax professional. See Form 4868 for more information.

Limit on additional extensions. You generally cannot get a total extension of more than 6 months. However, if you are outside the United States and meet certain tests, you may be able to get a longer extension.

For more information, see Publication 54.

Foreign Bank Accounts

FinCEN Form 114. You must file Form 114, Report of Foreign Bank and Financial Accounts (FBAR), if you had any financial interest in, or signature or other authority over a bank, securities, or other financial account in a foreign country. You do not need to file the report if the assets are with a U.S. military banking facility operated by a financial institution or if the combined assets in the account(s) are $10,000 or less during the entire year.

Form 114 is filed electronically with the Financial Crimes Enforcement Network (FinCEN). See the filing instructions at http://www.bsaefiling.fincen.treas.gov/main.html.

Form 8938. You also may be required to file Form 8938 with your U.S. income tax return to report your interest in foreign bank accounts and other specified foreign financial assets. For taxpayers living abroad, you generally do not have to file Form 8938 unless the total value of your specified foreign financial assets is more than $200,000 ($400,000 if married filing jointly) on the last day of the tax year or more than $300,000 ($600,000 if married filing jointly) at any time during the tax year. For more information, see Form 8938 and its instructions.

U.S. Government Payments

Wages earned for performing services outside the United States is foreign income, regardless of your employer. If you are a U.S. citizen or resident alien, you must report all income from worldwide sources on your tax return unless it is exempt by U.S. law. This applies to earned income (such as wages) as well as unearned income (such as interest, dividends, and capital gains). If you are a nonresident alien, your income from sources outside the United States is not subject to U.S. tax.

Foreign Earned Income Exclusion

Employees of the U.S. Government are not entitled to the foreign earned income exclusion or the foreign housing exclusion/deduction under section 911 because "foreign earned income" does not include amounts paid by the U.S. Government as an employee. But see Other Employment, later.

Special Situations

In the following two situations, your pay is from the U.S. Government and does not qualify for the foreign earned income exclusion.

U.S. agency reimbursed by foreign country. If you are a U.S. Government employee paid by a U.S. agency to perform services in a foreign country, your pay is from the U.S. Government and does not qualify the foreign earned income exclusion or the foreign housing exclusion/deduction. This is true even if the U.S. agency is reimbursed by the foreign government.

Employees of post exchanges, etc. If you are an employee of an Armed Forces post exchange, officers' and enlisted personnel club, Embassy commissary, or similar instrumentality of the U.S. Government, the earnings you receive are paid by the U.S. Government. This is true whether they are paid from appropriated or nonappropriated funds. These earnings are not eligible for the foreign earned income exclusion or the foreign housing exclusion/deduction.

Tax Treaty Benefits

Most income tax treaties contain an article relating to remuneration from government services. Even if you are working in a foreign country with which the United States has an income tax treaty in force and the treaty article that applies to government services says that your government pay is taxable only in the foreign country, the treaty will likely contain a "saving clause", which provides that the United States may tax its citizens and its residents as if the treaty had not come into effect. In some treaties, the government service article is an exception to the saving clause, but often only for individuals who are not U.S. citizens or green card holders. Consequently, if you are a U.S. citizen or green card holder, you will generally not be entitled to reduce your U.S. tax on your government pay. If you are neither a U.S. citizen nor green card holder, and you are treated as a resident of the treaty country under the treaty residence article (after application of the so-called "tie-breaker" rule), then you may be entitled to benefits under the government service article. Review the treaty text carefully.

TIP: U.S. citizens must always file Form 1040. Non-U.S. citizens who are treated as a resident of a treaty country under the treaty residence article (after application of the so-called "tie-breaker" rule) may file Form 1040NR and attach Form 8833.

If you pay or accrue taxes to the foreign country on your pay, you may be able to relieve double taxation with a foreign tax credit. Most income tax treaties contain an article providing relief from double taxation. Many treaties contain special foreign tax credit rules for U.S. citizens who are residents of a treaty country. For more information on the mechanics of the foreign tax credit, see Foreign Taxes, later.

Allowances, Differentials, and Special Pay

Most payments received by U.S. Government civilian employees for working abroad, including pay differentials, are taxable. However, certain foreign areas allowances, cost of living allowances, and travel allowances are tax free. The following discussions explain the tax treatment of allowances, differentials, and other special pay you receive for employment abroad.

Pay differentials. Pay differentials you receive as financial incentives for employment abroad are taxable. Your employer should have included these differentials as wages on your Form W-2, Wage and Tax Statement.

Generally, pay differentials are given for employment under adverse conditions (such as severe climate) or because the post of duty is located in a hazardous or isolated area that may be outside the United States. The area does not have to be a qualified hazardous duty area as discussed in Publication 3. Pay differentials include:

Tax-free foreign areas allowances are allowances (other than post differentials) received under the following laws.

Cost-of-living allowances. If you are stationed outside the continental United States or in Alaska, your gross income does not include cost-of-living allowances (other than amounts received under Title II of the Overseas Differentials and Allowances Act) granted by regulations approved by the President of the United States. The cost-of-living portion of any other allowance (for example, a living and quarters allowance) is not included even if the underlying allowance is included in gross income. Cost-of-living allowances are not included on your Form W-2.

Federal court employees. If you are a federal court employee, the preceding paragraph also applies to you. The cost-of-living allowance must be granted by rules similar to regulations approved by the President.

American Institute in Taiwan. If you are an employee of the American Institute in Taiwan, allowances you receive are exempt from U.S. tax if they are equivalent to tax-exempt allowances received by civilian employees of the U.S. Government.

Federal reemployment payments after serving with an international organization. If you are a federal employee who is reemployed by a federal agency after serving with an international organization, you must include in income any reemployment payments you receive. These payments are equal to the difference between the pay, allowances, post differential, and other monetary benefits paid by the international organization and the pay and other benefits that would have been paid by the federal agency had you been detailed to the international agency.

Allowances or reimbursements for travel and transportation expenses. See How To Report Business Expenses, later, for a discussion on whether a reimbursement or allowance for travel or transportation is included in your income.

Lodging furnished to a principal representative of the United States. If you are a principal representative of the United States stationed in a foreign country, you do not have to include in income the value of lodging (including utilities) provided to you as an official residence. However, amounts paid by the U.S. government for your usual costs of operating and maintaining your household are taxable. If amounts are withheld from your pay to cover these expenses, you cannot exclude or deduct those amounts from your income.

Peace Corps. If you are a Peace Corps volunteer or volunteer leader, some allowances you receive are taxable and others are not.

Taxable allowances. The following allowances must be included on your Form W-2 and reported on your return as wages.

Example. Gary Carpenter, a Peace Corps volunteer, gets $175 a month during his period of service, to be paid to him in a lump sum at the end of his tour of duty. Although the allowance is not available to him until the end of his service, Gary must include it in his income on a monthly basis as it is credited to his account.

Nontaxable allowances. These generally include travel allowances and the part of living allowances for housing, utilities, food, clothing, and household supplies. These allowances should not be included on your Form W-2. These allowances are tax free whether paid by the U.S. Government or the foreign country in which you are stationed.

Other Income

Other employment. If, in addition to your U.S. government pay, you receive income from a private employer or self-employment, you may qualify to claim the foreign earned income exclusion and the foreign housing exclusion and deduction under section 911 based on this other income provided you meet either the bona fide residence test or the physical presence test. In addition, if your spouse is a U.S. citizen or resident alien who earns income in a foreign country that is paid by a private employer or is from self-employment, he or she may also qualify for the exclusion or the deduction. For more information, see Publication 54.

The tax treaty rules relating to income from personal services generally apply to income from private employment. As discussed above, the saving clause applies to you if you are a U.S. citizen or if you are a resident of the United States under the treaty residence article (after application of the so-called "tie-breaker" rule).

Sale of personal property. If you have a gain from the sale of your personal property (such as an automobile or a home appliance), whether directly or through a favorable exchange rate in converting the proceeds to U.S. dollars, the excess of the amount received in U.S. dollars over the cost or other basis of the property is a capital gain. Capital gains are reported on Schedule D (Form 1040), Capital Gains and Losses. However, losses from sales of your personal property, whether directly or through an unfavorable exchange rate, are not deductible.

Sale of your home. All or part of the gain on the sale of your main home, within or outside the United States, may be taxable. Losses are not deductible.

You may be able to exclude from income any gain up to $250,000 ($500,000 on a joint return). Generally, you must have owned and used the home as your main residence for two of the five years preceding the date of sale.

You can choose to have the 5-year test period for ownership and use suspended during any period you or your spouse is serving on qualified official extended duty as a member of the Foreign Service of the United States, as an employee of the intelligence community, or as an employee or volunteer of the Peace Corps.

For detailed information on selling your home, see Publication 523.

Deductions and Credits -- Business Expenses

You may deduct certain expenses such as travel expenses, transportation expenses, and other expenses connected to your employment.

Travel Expenses

Subject to certain limits, you can deduct your unreimbursed ordinary and necessary expenses of traveling away from home in connection with the performance of your official duties. These expenses include such items as travel costs, meals, lodging, baggage charges, local transportation costs (such as taxi fares), tips, and dry cleaning and laundry fees.

TIP: Your home for tax purposes (tax home) is your regular post of duty regardless of where you maintain your family home. Your tax home is not limited to the Embassy, consulate, or duty station. It includes the entire city or general area in which your principal place of employment is located.

Traveling away from home. You are traveling away from home if you meet both of the following requirements.

Temporary assignment. If your assignment or job away from your tax home is temporary, your tax home does not change. You are considered to be away from home for the whole period, and your travel expenses are deductible. Generally, a temporary assignment in a single location is one that is realistically expected to last (and does in fact last) for one year or less.

However, if your assignment or job is indefinite, the location of the assignment or job becomes your new tax home and you cannot deduct your travel expenses while there. An assignment or job in a single location is considered indefinite if it is realistically expected to last for more than one year, whether or not it actually lasts for more than one year.

You must determine whether your assignment is temporary or indefinite when you start work. If you expect employment to last for one year or less, it is temporary unless there are facts and circumstances that indicate otherwise. Employment that is initially temporary may become indefinite due to changed circumstances. A series of assignments to the same location, all for short periods but that together cover a long period, may be considered an indefinite assignment.

Exception for federal crime investigations or prosecutions. If you are a federal employee participating in a federal crime investigation or prosecution, you may be able to deduct travel expenses even if you are away from your tax home for more than one year. This exception to the one-year rule applies if the Attorney General certifies that you are traveling for the federal government in a temporary duty status to prosecute, or provide support services for the investigation or prosecution of, a federal crime.

Limit on meals and entertainment. You can generally deduct only 50% of the cost of your unreimbursed business-related meals and entertainment. However, the limit does not apply to expenses reimbursed under a U.S. Government expense allowance arrangement.

Individuals subject to hours of service limits. You can deduct 80% of your unreimbursed business-related meal expenses if the meals take place during or incident to any period subject to the Department of Transportation's hours of service limits.

Individuals subject to the Department of Transportation's "hours of service" limits include the following.

If your trip was mainly personal, you cannot deduct your travel expenses to and from your destination. This applies even if you engage in business activities while there. However, you can deduct any expenses while at your destination that are directly related to your business.

Expenses paid for others. You generally cannot deduct travel expenses of your spouse, dependents, or other individuals who go with you on a trip.

Home leave. The Foreign Service Act requires U.S. citizens who are members of the foreign service to take a leave of absence after completing 3 years of continuous service abroad. This period is called "home leave" and can be used to take care of certain personal matters such as medical and dental checkups, buying a new wardrobe, and visiting relatives.

The amounts paid for your travel, meals, and lodging while on home leave are deductible as travel or business expenses subject to the rules and limits discussed earlier. You must be able to verify these amounts in order to claim them. Amounts paid on behalf of your family while on home leave are personal living expenses and are not deductible.

More information. See chapter 1 of Publication 463.

Other Employee Business Expenses

You may be able to deduct other unreimbursed expenses that are connected with your employment.

Membership dues. You can deduct membership dues you pay to professional societies that relate to your business or profession.

Subscriptions. You can deduct subscriptions to professional publications that relate to your business or profession.

Educational expenses. Generally, educational expenses are considered to be personal expenses and are not deductible. However, under some circumstances, educational expenses are deductible as business expenses.

You can deduct educational expenses as business expenses if the education:

See Publication 970, Tax Benefits for Education, for more information on educational expenses.

TIP: Educational expenses that are not work related, such as costs of sending children to college, are personal expenses that you cannot deduct. However, you may be eligible for other tax benefits such as the American opportunity and lifetime learning credits; contributions to a Coverdell education savings account or qualified tuition program; deduction for student loan interest; and exclusion from income of certain savings bond interest. These benefits are explained in Publication 970.

Foreign service representation expenses. If you are an employee of the U.S. Foreign Service and your position requires you to establish and maintain favorable relations in foreign countries, you may receive a nontaxable allowance for representation expenses. If your expenses are more than the allowance you receive, you can deduct the excess expenses as an itemized deduction on Schedule A (Form 1040) if you meet one of the following conditions.

Impairment-related work expenses. If you are an employee with a physical or mental disability, you can deduct attendant-care services at your place of work and other expenses in connection with work that are necessary for you to be able to work. Attendant care includes a reader for a blind person and a helper for a person with a physical disability. These expenses are reported on 2106-EZ and carried to Schedule A (Form 1040). They are not subject to the 2%-of-adjusted-gross-income limit on miscellaneous itemized deductions.

Loss on conversion of U.S. dollars into foreign currency. The conversion of U.S. dollars into foreign currency at an official rate of exchange that is not as favorable as the free market rate does not result in a deductible loss.

Recordkeeping Rules

If you claim a deduction for unreimbursed business expenses, you must keep timely and adequate records of all your business expenses.

For example, you must keep records and supporting evidence to prove the following elements about deductions for travel expenses (including meals and lodging while away from home).

Each expense should be recorded separately in your records. However, some items can be totaled in reasonable categories. You can make one daily entry for categories such as taxi fares, telephone calls, meals while away from home, gas and oil, and other incidental costs of travel. You may record tips separately or with the cost of the service.

RECORDS: Documentary evidence generally is required to support all lodging expenses while traveling away from home. It is also required for any other expense of $75 or more, except transportation charges if the evidence is not readily available. Documentary evidence is a receipt, paid bill, or similar proof sufficient to support an expense. It ordinarily will be considered adequate if it shows the amount, date, place, and essential business character of the expense.

CAUTION: A canceled check by itself does not prove a business cost. You must have other evidence to show that the check was used for a business purpose.

Your records must be timely. Record the elements for the expense in your account book or other record at or near the time of the expense. A timely-kept record has more value than statements prepared later when, generally, there is a lack of accurate recall.

Confidential information. You do not need to put confidential information relating to an element of a deductible expense (such as the place, business purpose, or business relationship) in your account book, diary, or other record. However, you do have to record the information elsewhere at or near the time of the expense and have it available to fully prove that element of the expense.

More information. Recordkeeping is discussed in detail in chapter 5 of