Frequently Asked Questions

The following are frequently asked questions about completing the various U.S. taxpayer forms.

Which of the three (3) forms do I need to send to AIARC?

Each year, you must complete and return the following three forms: (1) Form W-4, (2) Form 673, and (3) 403(b) SRA Form. These forms will help AIARC estimate the appropriate tax withholding in accordance with the guidelines issued by the Internal Revenue Service (IRS).

When should I write “exempt” on my W-4?

You can only claim exemption from withholding if you meet both of the following conditions: (1) you had no federal income tax liability in the prior year and were refunded all of the federal income tax withheld and (2) you expect to have no federal income tax liability in the current year. Please understand if you choose “exempt” from withholding and you owe taxes for that year, in the following year the Internal Revenue Service (IRS) may instruct AIARC to withhold tax without consideration of the foreign earned income exclusion for a specific amount and/or timeframe because the IRS has determined that you, as a U.S. taxpayer, did not have the appropriate amount of tax withheld. Please note that AIARC will comply with the IRS notice until you directly resolve any withholding or tax issues with the IRS. AIARC will continue to withhold tax according to the IRS’s instructions until AIARC receives a release notice from the IRS. If you are claiming “exempt,” write “exempt” on Form W-4 in the space between Step 4 (c) and Step 5. Then, complete only Steps 1a, 1b, and 5, and sign the form to validate it. (Do not complete any other steps).

If I claimed “exempt” on my W-4 last year, why do I have to complete the W-4 again?

The exemption is valid for only one year. The IRS requires that a new Form W-4 be completed each year to claim the exemption. Please note that if you had a federal income tax liability for the prior calendar year, you cannot claim “exempt” for this current calendar year. If you do not complete a new Form W-4, AIARC will withhold taxes as if you are single with no adjustments for deductions, in accordance with the guidelines issued by the Internal Revenue Service.

Why is Form 673 important?

Your signed Form 673 is your legal declaration that you meet the criteria established by the Internal Revenue Service to qualify for the foreign earned income exclusion and the foreign housing exclusion. If you qualify under either the Bona Fide Residence Test or the Physical Presence Test for a calendar year, you may exclude up to a certain amount of your foreign earnings on your tax return. In addition, you may be eligible to take the foreign housing exclusion if your housing expenses are expected to be above the minimum threshold (floor amount) established by the IRS. Correspondingly, if your total housing expenses are expected to exceed the maximum threshold (ceiling amount) and adjusted for living in a high-cost locality, the maximum amount that you will be able to exclude is the difference between the maximum ceiling amount and the minimum floor amount. Please refer to the IRS publication for the minimum and maximum thresholds as well as a sample of the calculation.

On Form 673, which box should I check, Bona Fide Residence Test or Physical Presence Test?

You should check the box for the test that serves as the justification for you to claim the exemption. The Bona Fide Residence Test requires that you (the employee) be a “bona fide resident” of a foreign country or countries for an uninterrupted period that includes a full tax year. The Physical Presence Test requires that you (the employee) be present in a foreign country or countries at least 330 full days during any period of 12 consecutive months. For detailed descriptions of both tests, please refer to Internal Revenue Service’s Publication 54.

How do I estimate the amount of the foreign housing exclusion that I can take?

Please refer to the Instructions for Form 2555 on the Internal Revenue Service website.

What can I include as housing expenses in the calculation?

As indicated in Internal Revenue Service Publication 54, Foreign Housing Expense is defined as reasonable expenses paid or incurred by you for housing in a foreign country for you and your spouse and dependents during the period for which you claim a foreign housing exclusion or deduction. Examples of legitimate housing expenses include:

• Rent,
• Fair rental value of housing provided in kind by your employer, (which is also reported as a taxable fringe benefit on your W-2)
• Repairs,
• Utilities (other than telephone charges),
• Real and personal property insurance,
• Nondeductible occupancy taxes,
• Nonrefundable fees for securing a leasehold,
• Rental of furniture and accessories, and
• Residential parking.

Housing expenses do not include:

• Expenses that are lavish or extravagant under the circumstances,
• Deductible interest and taxes (including deductible interest and taxes of a tenant-stockholder in a cooperative housing corporation),
• The cost of buying property, including principal payments on a mortgage,
• The cost of domestic labor (housekeepers, gardeners, etc.),
• Pay television subscriptions,
• Improvements and other expenses that increase the value or appreciably prolong the life of property,
• Purchased furniture or accessories, or
• Depreciation or amortization of property or improvements.