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What is income?

And so we begin! WHAT IS INCOME. This is my take – my ‘real’ executive summary of the U.S. tax system as it applies to you – the person living outside the U.S. who may or may not owe any tax to the IRS but who is subject to a whole lot of penalties if he or she is responsible for filing an annual tax return but is not doing so…..or is not doing it correctly.

There are actually three sections, here: an overview of what is income and the categories you might fall under for reporting that income; a calendar of your tax filing deadlines for 2015; the ‘working basics’ for U.S. tax filers living overseas.

Yeah, you can skip the first two parts if you want but really, there’s not that much reading, so go ahead and skim through the preliminary stuff – you are really better off doing so! It’s just about 2,000 words, and this brief section explains what the IRS considers income and the categories under which you the tax filer fall and thus, how that income is treated. Yes, it is a convoluted process but if you believe in the ‘cover your ass’ doctrine, then read this ‘prelude’ and …..CYA! And go online, too!

The online stuff: GO TO THE IRS WEBSITE: www.irs.gov ! Don’t just take my word for it – this is where the IRS wants you to go to learn about what you are responsible for. See it for yourself….try it…..and then come back to this book as it’ll be a whole lot easier to understand! There’s an awful lot that you will find in the IRS site - some say that there’s too much and thus too difficult to navigate.

Anyhow, now that you’ve been thoroughly confused, here’s what you really need. Yes, sir, folks, here it is, the list of what you have to declare as taxable income - at least, according to the IRS, almost (but not quite) using their very own words:

*All wages, salaries and tips, no matter where from

*Taxable interest (yes, there is a non-taxable variety, as well.....)

*Dividends - both qualified and not qualified (a lower tax rate for the latter)

*State tax refunds- this only applies if you itemized your deductions last year

*Alimony received

*Self-employment, sole-proprietorship business income or loss

*Capital gains or losses (maximum loss: $US3,000 after you’ve offset all of your gains)

*Other gains (the capital gain laws are complicated!)

*IRA distributions

*Taxable portion of pensions or annuities

*Rental real estate (or loss), royalties and a whole slew of K-1 reporting

*Farm income or loss

*Social security benefits

*Other income (but losses, too: this is where you offset your foreign earned income with your foreign income exclusions.)

That's it! All of the above is added up to become your total income, which, if you have any, you have got to report it. If you don't have any, you don't have to report it (unless your gross income is over $US10,150, as a single person, for 2014).

Then there are various adjustments you can use to further reduce total income to arrive at what the IRS calls your Adjusted Gross Income from which you either itemize your deductions or take a standard deduction. Frankly, most expats take the standard deduction, accounting for all of their excludable housing expenses on the form 2555 they file. The Foreign Earned Income Exclusion, Form 2555, is ONLY applicable to expats, but that's why you are reading this, in the first place! - read on for further details...and remember, both Form 2555 and the ‘lite’ edition of this form, Form 2555EZ have their URLs listed within this book, enabling you to go directly to the IRS website to download these forms and their instructions – assuming, of course, that you are reading this while you are online……otherwise, simply remember www.irs.gov - hey, that’s an easy site to remember!

And now we come to the classifications under which you fall for tax reporting purposes. There are four categories into which you basically ‘fit’ and these categories each determine the amount of your standard deduction.

*MFJ - Married Filing Jointly, or QW - Qualified Widow (hopefully, you do not

come under the Qualifying Widow/Widower category but if you do, then there are tax benefits) will be able to take an additional deduction amounting to $US12,600 from your income in order to arrive at your taxable income.

*Single Not married? This is your category. Yes, you can still have dependents, but you would generally be filing as a single taxpayer, entitled to a $US6,300 standard deduction, half the amount that a married couple gets.

*MFS Married Filing Separately If your spouse is not a citizen of the U.S., then

you have an interesting option vis a vis reporting responsibilities - especially if you own little but your spouse is ‘loaded’. If you have a non-U.S. citizen spouse with substantial assets and income, he or she simply might not want to report to the IRS. Frankly, there are many expats or green card holders who have income producing assets and have placed those assets in spousal name to ‘escape’ reporting. Alarmed at putting it all in your spouse's name? Don't be: even the things I owned were no longer mine, so long ago in an equal division of property California divorce where equal division meant that my ex got all the assets while I got all the liabilities. If you file MFS, you've got a $US6,300 standard deduction for 2014.

*HOH Head of Household If you have dependents living with you and are

not married, there are some tax advantages and some trade-offs in filing as HOH. True, you are going to get an $US9,250 standard deduction for 2014 but in the process, you will lose the exemption for the person qualifying you to take HOH. Speak to your tax advisor about which is better for you: either HOH or MFS, if you have dependents.

O.K. After you've taken your standard (or itemized deductions if you have a large enough amount to itemize and it is to your advantage) deduction, then you can take a personal exemption for you and an exemption, as well, for all those who qualify as your dependents for whom you list both names, relationship and either Tax Identification Number - TIN - or Social Security Number - SSN. If you do not have that number available and you are liable for taxes, the IRS will not allow you the exemption without getting that number....so you'd better apply for one! Go to the IRS site and download Form W-7 and the instructions for that form – you’re going to have to file this form and commensurate back up papers, along with your tax return for the year to a ‘special’ address in Philadelphia, PA to get that TIN. A special word of advice: The IRS loses things – make sure you have copies of everything that you file when you apply for the TIN – you might have to file again…and again…and again. Alas, the tax bureaucracy in the U.S. is not what it might have previously been – papers filed get lost far more frequently than the IRS will ever willingly admit!

Aha! We've now arrived at your taxable income........now you have to compare this with what your Alternative Minimum Tax - AMT - might be and you’re going to have to pay the higher amount.

For an explanation of what the Alternative Minimum Tax is, go to that very specivic section, right here in this my 2015 edition. I wrote a gem of an explanation for which I guarantee you this: As soon as you read it, you will understand what the AMT is....yet a week later, you'll have to re-read this, to remember what it is.....Sadly, the AMT is a tax that simply defies memory retention!

Regardless, from the this point on, there are various and sundry credits to which you might be eligible for, which will reduce your tax bill - if you owe any taxes.....and if you are a self-employed sole proprietor, reporting your income and expenses on a Schedule C, even though you may be eligible for the foreign earned income exclusion, you are going to be liable for Social Security and Medicare taxes. Thus, if you are a sole proprietorship, plan to set aside that additional 15.3 percent of your taxable Schedule C income. This social security tax obligation for the self-employed is frequently a very rude awakening for the ‘uninformed’…..if you fall into this category, consider yourself forewarned!

Your expat 2015 U.S. tax calendar:

1 January 2015 the tax year begins for individuals who are on a calendar year (come on, now - we're all calendar year taxpayers, whether we like it or not!). The 'Entire taxable year' Begins on January 1 (which falls on a Thursday in 2015). You are on a ‘cash basis’ for tax purposes – if you receive any income in the calendar year, you’ll have to include it during that year. If you ‘earned’ income that you did not receive until the next year (payments that should have been made to you in 2014 that you did not actually receive until sometime during 2015?), then don’t worry about that income – it’ll be part of your 2015 taxable income – unless you receive a Form 1099 which includes that income…..

15 January 2015 This date is the deadline for final payment of estimated federal income taxes for the last voucher of the 2014 1040ES.

31 January 2015 You can 'technically' avoid that 15 January deadline for payment of estimated taxes if you actually file your final tax return and pay final taxes by 31 January. How you are going to do this, though, when the likelihood that all of the forms you are going to need to file correctly, will simply not have been issued by this date?

15 April 2015 Ah, you've all heard of this day - it is tax day, across the land, except for Massachusetts, where they run the Boston Marathon as part of their Patriot's Day holiday, entitling you to file one day late.

Your first quarter, 2015 1040ES is due on this date

Your IRA payment just might be due by this date

Generally, this is the date for filing form 1040 unless you are on extension....gift tax returns are also due on 15 April and it is also the final date for filing an amended tax return for the third previous tax year.

15 June 2015 this one is important for expats! This day, my friends, is the

deadline for filing the 2014 tax return. You'd better file it - and have proof of mailing as 'insurance', or you'd better file an extension of time through 15 October to file (and, if you have sent in a proper letter request from overseas, an additional 2 months to 15 December) You'll still have interest due and underestimated penalties if you underestimated your pre-payments and filed under extension, before your extension deadline, but you'll avoid some very costly penalties by filing your extension request - this extension form is virtually automatically approved. Oh, you can be the first to be penalized in this instance, if your extension application is denied - but I doubt it......! If you are a first time overseas filer, this is also the best date to file a specific form (2350) for filers who simply want to wait until they qualify under the physical presence test (we'll cover this one, later in the book!) in order to take advantage of foreign exclusions.

And...it is also the day for filing voucher #2 of the 1040ES.

30 June 2015 – Did you efile your FinCEN114 by today? You are late, otherwise. Want to find out more? Read that part of the book explaining the world’s stupidest URL – one that common sense would dictate be easy but instead, the government has given this a URL that simply cannot be memorized!

15 September 2015 Voucher # 3, third quarter payment of your 1040ES is due, today, if you are going to owe anything for 2015 - time to pay...!

15 October 2015 Contrary to what the IRS or your accountant might lead you to

believe you definitely can file for further extension through 15 December – but you’d better do this before 15 October. Personally, I try to avoid anything dealing with tax after 15 October (because I value my sanity and, after nearly five decades of doing tax work, I really need to cut off by 15 October!!!) but the IRS will still allow you those extra two months if you file that additional extension.

31 December 2015 The year's over - new income tomorrow? Worry about it next year!! What’s this - you say that in spite of reading this you still have no idea of the tax system? Well, apparently, neither does most of America!

Why? Will it ever change?