Do I need to file a US tax return if I live in UAE?
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AM I ELIGIBLE FOR FOREIGN EARNED INCOME EXCLUSION?
Learn from Tanveer Mannan, a highly experienced IRS Enrolled Agent based in Dubai.
Having worked at EY and PWC before joining Expat Tax Online, Tanveer has 15 years’ experience of helping Americans get the correct advice when they come to work in UAE.
Getting the correct tax advice in the early days can make things a lot easier to deal with, even before a person leaves the United States.
Once someone leaves the US and comes to Dubai, who is required to file a US TAX RETURN?
When you think of the UAE, the first thing that comes to mind is no income tax. It’s easy to assume that coming from the US and now living in the UAE means no tax to pay, no tax return to file.
Unfortunately, it’s not that easy. The US has citizenship-based income tax filing requirements, which means if you are a US citizen or Green Card Holder (no matter where you live) as long as you earn some income you may have to file a tax return.
To claim this exclusion, you must file an income tax return
Failure to file your income tax return means that the IRS can deny your exclusion. You will then be expected to pay income tax on ALL your income.
People do make the mistake of believing that because they earn less than the $105,000 that they do not need to file an income tax return. You must file if you earn over $12,000 a year when you’re single or if you’re self-employed and earning more than $400 per year.
Am I eligible for FOREIGN EARNED INCOME EXCLUSION?
If you have lived in the UAE for at least 12 months, you may qualify for the FOREIGN EARNED INCOME EXCLUSION which could mean you won’t have any tax to pay to a limit. If you’re short of 12 months, you can extend your filing date with an extension to file at a later time, once you’ve been outside the US for the 12 months.
This will depend on:
- How much you earn.
- Housing and rental expenses.
- Family circumstances.
If you earn up to $105,000 (2019) per year you may exclude your entire income by claiming Foreign Earned Income Exclusion on your income tax return.
What is STANDARD DEDUCTIONS?
Depending on your filing status, you may be eligible for STANDARD DEDUCTIONS. A single person may claim up to $12,000 and if you’re married to a US citizen or Green Card holder, up to $24,000.
TANVEER: “I have a client who works for a hospital in Dubai. She is single and earns approximately $160,000 per year and spends approximately $60,000 on housing expenses.
Once we claimed all the exclusions and standard deductions available to her, she doesn’t pay any US tax at all.”
Looking at this example it is easy to see how you could earn quite a lot of money working in the UAE, without having to pay any tax.
When do filing requirements start?
Filing requirements kick in when you have annual worldwide income above $12,000 if you’re single. (Just $5 if you’re married to a non-American and $24,400 if you’re married to a US citizen or Green Card holder and filing jointly. File if you’re self-employed and earning over $400).
However, this does not necessarily mean that you must pay US income tax, but you must file a tax return.
What if I’m way behind on my U.S. tax returns?
There is a special IRS program to help you catch up on your U.S. taxes safely, without fines and penalties
STREAMLINED AMNESTY
It’s for American citizens that didn’t know they had to file U.S. tax returns each year, and have therefore fallen behind. Some more than 30 years! With the IRS Streamlined Procedure, say goodbye to overdue tax returns, late fees, and penalties. If you have children, we can backdate your Child Tax Credit Refund for 3 years.
Get a quote here.
What if my earnings are much higher than the tax threshold amount?
You will only pay tax on the amount left after all available exclusions and reductions have been taken.
TANVEER: “I have a client who is employed in a senior position and earns $200,000 per year. Once he has claimed the housing exclusion and standard deduction, he is left with approximately $40,000 of taxable income.”
Tax may be payable at a higher rate, but it would still only be calculated on $40,000.
What is the HOUSING EXCLUSION and how can I qualify for this?
The Housing Exclusion is a further deduction which can be made on your income tax return.
When you incur living expenses in UAE, you may qualify for the Housing Exclusion.
These expenses include:
- Rent
- Utilities
- Furniture Rental
- Real Estate Fees
The IRS has determined that the first $17,000 of expenses are not eligible for the Housing Exclusion because it would cost you that much to live in the US (country average).
Although each city differs in its allowance, Dubai, for example offers a Housing Exclusion of up to $57,000 per year. This is the IRS expectation of typical housing expenses in Dubai.
This means that you could claim up to $40,000 ($57k – $17k) with the Housing Exclusion in addition to the $105,000 salary which would give you up to $145,000 tax free income
How much time can I spend back in the US without losing these tax benefits?
In order to qualify for Foreign Earned Income Exclusion, you must satisfy one of following 2 criteria:
Physical Presence Test:
To meet the physical presence criteria, you must limit any return visit to the US to no more than 35 days in the first year only.
Bonafide Resident Test:
To meet the bonafide resident criteria, you must remain in the tax residency for the whole of the first year, all 365 days of the calendar year.
Most people qualify in the first year and are then at liberty to return to the US in following years for more than 35 days without problem.
Your first year is from the date you arrive.
Example:
A client arrived in Dubai July 1.
Between July 1 and June 30 the following year, she limits her visits back to the US to less than 35 days.
We then file her tax return after June 30 so the year is complete.
Once you have qualified for the Bonafide Residence Test you are no longer limited to 35 days back in the US. Anything up to 3 months is acceptable although stays of 6 months may not be.
Does the Bonafide Residence apply to Green Card Holders?
No. Green Card Holders can only qualify for the Physical Presence Test.
While the Physical Presence criteria requires you spend no more than 35 days in the US per year, Green Card Holders should be aware that immigration may require them to spend more than 35 days in the US.
This can prevent them from qualifying for all the exclusions.
What if an American in the UAE is married to a non-American Green Card Holder wants to file jointly on the same tax return?
In order to qualify for exclusions and deductions ALL Green Card Holder must not spend longer than 35 days in the US.
Their tax returns must also be filed from the date they receive their Green Card.
Can I get a tax credit if I have children?
Yes, if you are married with children you can claim further tax rebates of around $2,000.
For the majority of people working in UAE, they will be able to do so without having any tax liability by claiming the exclusions and reductions detailed.
However, the key thing to remember is that once you have earned over $12,000 you MUST file a Federal Tax Return.
It is unlikely that there are any Americans working in UAE who are earning less than $12,000, therefore you have a filing requirement in order to remain compliant with IRS.
What is STANDARD DEDUCTIONS?
Depending on your filing status, you may be eligible for STANDARD DEDUCTIONS. A single person may claim up to $12,000 and if you’re married to a US citizen or Green Card holder, up to $24,000.
TANVEER: “I have a client who works for a hospital in Dubai. She is single and earns approximately $160,000 per year and spends approximately $60,000 on housing expenses.
Once we claimed all the exclusions and standard deductions available to her, she doesn’t pay any US tax at all.”
Looking at this example it is easy to see how you could earn quite a lot of money working in the UAE, without having to pay any tax.
What if I had to return to the US for more than 35 days in the first year?
You could then file your tax return the following year under the Bonafide Resident Criteria.
Will filing a late tax return cause a problem with fines and penalties?
This depends if there is any tax due. If no tax is due, we can file for a special extension which will extend your tax deadline. This will ensure you don’t pay any late filing penalty. You can then file once you have qualified for Bonafide Residency.
If tax is due, you can pay this before 15th April to ensure no late penalties.
You can then file your return once you have qualified for Bonafide Residency.
If you pay taxes in advance you don’t have to worry about late filing penalties or late payment interest.
The IRS are just looking for you to make you payment on time.
We manage this whole process for our clients.
How much time can I spend back in the US without losing these tax benefits?
In order to qualify for Foreign Earned Income Exclusion, you must satisfy one of following 2 criteria:
Physical Presence Test:
To meet the physical presence criteria, you must limit any return visit to the US to no more than 35 days in the first year only.
Bonafide Resident Test:
To meet the bonafide resident criteria, you must remain in the tax residency for the whole of the first year, all 365 days of the calendar year.
Most people qualify in the first year and are then at liberty to return to the US in following years for more than 35 days without problem.
Your first year is from the date you arrive.
Example:
A client arrived in Dubai July 1.
Between July 1 and June 30 the following year, she limits her visits back to the US to less than 35 days.
We then file her tax return after June 30 so the year is complete.
Once you have qualified for the Bonafide Residence Test you are no longer limited to 35 days back in the US. Anything up to 3 months is acceptable although stays of 6 months may not be.
If you are an Emirati with a Green Card, when does tax return filing start?
Once your application for a Green Card is approved you will be issued Green Card papers. You can then enter the US. You will become a tax resident of the United States from the date of entry. Any income you earn from this date will be taxed in the US, regardless of where you earn it.
Your 35 days will also start from this date of entry.
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