The following are frequently asked questions about completing the various forms.
Which forms do I need to send to AIARC?
Each year, you must complete and return Form W-4, Form 673, and the 403 (b)
SRA Form, in order for AIARC to determine the appropriate tax withholding in accordance with the guidelines issued by the IRS.
When should I write “exempt” on my W-4?
You can only claim exemption from withholding if 1) you had no income tax liability the prior year and were refunded all of the federal income tax withheld and 2) you expect to have no tax liability in the current year and expect a full refund of all federal income tax withheld. Please understand if you choose exempt from withholding and you owe taxes for that year, in the following year the IRS may issue a notice to AIARC to withhold taxes for a specific amount and/or timeframe because the Internal Revenue Service has determined that the Center employee has not submitted the appropriate tax withholding. Please note that AIARC will comply with the Internal Revenue Service notice, until you resolve any withholding or tax issues with the Internal Revenue Service. AIARC will continue to withhold tax until AIARC receives a release notice from the IRS. If you are claiming exempt, complete only lines 1, 2, 3, 4, and 7 and sign the form to validate it (Do not complete lines 5 & 6).
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 W-4 be completed each year in order to claim the exemption. Please note that if you had a tax liability last calendar year, you cannot be exempt for the current calendar year. If you do not complete a new Form W-4, AIARC will withhold taxes as if you are single with no withholding allowances, in accordance with the guidelines issued by the IRS.
Why is Form 673 important?
Your signed Form 673 is your legal declaration to the IRS that you expect to qualify for the foreign earned income exclusion and the foreign housing exclusion. Based on calendar year 2019’s maximum exclusion amounts, if you qualify under either the Bona Fide Residence Test or the Physical Presence Test, you may exclude up to $105,900 of your foreign earnings. In addition, you may be eligible to take the foreign housing exclusion if your housing expenses are expected to be at least $16,944 (the minimum floor amount). If your total housing expenses are expected to exceed $31,770 (the maximum ceiling amount, unless you live in a high-cost locality), the maximum amount that you will be able to exclude is $14,826, which is the difference between the maximum ceiling amount of $31,770 and the minimum floor amount of $16,944. Please refer to the FAQ, “How do I estimate the amount of the foreign housing exclusion that I can take?” for sample calculations.
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?
Based on 2019’s maximum exclusion amounts, to be eligible for the foreign housing exclusion, your total housing costs must be greater than the base amount of $16,944 (the minimum floor amount). The general allowable maximum amount (the ceiling) of housing that can be included in calculating the exclusion is $31,770. However, if you live in a high-cost locality, you may be able to use a higher limit than the general allowable maximum of $31,770. Please refer to the Instructions for Form 2555 on the IRS website to determine if the country and/or city where you live is considered a high-cost locality.
Below are examples for calculating the exclusion based on the general maximum amount (ceiling) of $31,770:
Below are examples for calculating the exclusion based on the general allowable maximum amount (ceiling) of $31,770:
|If your total housing costs are estimated at:
|Are you eligible for the exclusion?
|Are you above the maximum amount?
|Use lower of Actual or Maximum housing amount
|Less base housing amount
|Your foreign housing exclusion is:
If I live in Lima, Peru, is this considered a high-cost locality and how would this impact my calculation?
If you live in Lima, Peru, using the table for 2018 Limits on Housing Expenses in Instructions for Form 2555 to estimate the limit for 2019, your maximum amount would be $39,100 rather than the general maximum of $31,770 because Lima, Peru is considered a high-cost locality. Therefore, if your total housing costs were $40,000, your foreign housing exclusion would be $22,156 ($39,100-16,944) versus $14,826 in the above example.
What can I include as housing expenses in the calculation?
As indicated in IRS Publication 54, a Foreign Housing Expense is defined as reasonable expenses paid or incurred by you for housing in a foreign country for you and (if they live with you) for your spouse and dependents.
Examples of legitimate housing expenses include:
- Fair rental value of housing provided in kind by your employer, (which is also reported as a taxable fringe benefit on your W-2)
- 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 (maids, 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.
How much can I contribute to my retirement account?
There is a limit to the total amount of voluntary contributions that can be made in a calendar year.
For Calendar year 2019, U.S. law limits your maximum annual contributions to your retirement based upon the least of the following rules:
- Rule #1 - Employer contributions are calculated on compensation, up to a maximum of $280,000 per year;
- Rule #2 - Voluntary contributions must be no more than $19,000 (if 50 or older or will turn 50 by the end of 2019, you can make $6,000 in catch-up contributions for a maximum total of $25,000).
- Rule #3 - Employer contributions plus voluntary contributions must be no more than $56,000 (if 50 or older or will turn 50 by the end of 2019, your total contribution maximum is $62,000).
AIARC will perform the maximum contribution tests using the rules above to determine if your requested amount exceeds the allowable limit. If your amount exceeds, the limit, AIARC will notify you.