Section 911 and Other International Tax Rules Relating to U.S. Citizens and Residents (Portfolio 6080)

Tax Management Portfolio, Section 911 and Other International Tax Rules Relating to U.S. Citizens and Residents, discusses: (1) the various ways in which the United States has addressed the problem of double taxation of U.S. citizens and residents abroad; (2) provisions aimed at U.S. citizens and long-term residents who expatriate to avoid tax; (3) provisions of U.S. income tax treaties relevant to U.S. citizens and residents; and (4) miscellaneous international tax issues relevant to U.S. citizens and residents, such as deductibility of moving expenses and dual social security coverage.

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The United States taxes its citizens and residents on their worldwide income, even if they live or work outside of the United States. However, U.S. citizens and residents typically are also subject to foreign country taxation on income when they live or work overseas. Such competing tax regimes create a potential for double taxation. Section 911 allows qualified individuals to elect to exclude all or a portion of their foreign earned income from U.S. gross income, and to exclude or deduct certain foreign housing costs. To the extent that taxes paid to a foreign government are allocable to income not excluded under §911, a taxpayer may elect to take a credit against U.S. income tax either for taxes paid or taxes accrued to a foreign country. The interaction of §911 with the foreign tax credit rules under §901 can present U.S. citizens and residents with significant choices in relation to making or revoking such elections, particularly if they move between foreign countries with higher or lower tax rates relative to those in the United States.
The very existence of multiple tax jurisdictions creates mechanisms for avoiding tax; by moving tax nexus to a jurisdiction with a lower rate of tax, a taxpayer can enjoy significant tax savings. Individuals who renounce U.S. citizenship or terminate U.S. residency can be subject to tax determined under §877A on the inherent appreciation in their property by means of a deemed sale of all their assets on the day before the change in status or, in the case of earlier expatriates, determined under §877 for a 10-year period after the loss of citizenship or termination of residency. This portfolio examines the mechanisms of §877A and §877 and their related provisions, which were substantially revised in 2004 and again in 2008.


Section 911 and Other International Tax Rules Relating to U.S. Citizens and Residents was authored by the following experts.
Martha A. Klasing

Martha A. Klasing, B.S., Southern Illinois University — Carbondale; Master of Accounting (Taxation), University of Missouri – St. Louis; Partner, KPMG LLP; Certified Public Accountant; member, American Institute of Certified Public Accountants; contributor: Tax Management International Journal; International HR Journal; Tax Management Compensation Planning Journal; frequent speaker on international tax issues and developments.

Benedict Francis

Benedict Francis, B.A., University of Edinburgh; LL.M. (Taxation) with distinction, Georgetown University Law Center; Senior Manager, KPMG LLP; member, New York Bar, Bar of England and Wales; co-author, “Individuals Crossing International Lines,” 55 Major Tax Planning 10-1 (2003).

Table of Contents

Detailed Analysis

I. Section 911: The Foreign Earned Income and Housing Exclusions

A. Introduction

1. The History of § 911 Before 2006

2. The 2006 Amendments to § 911

a. Introduction

b. The Tax Increase Prevention and Reconciliation Act of 2005

B. Qualified Individual

1. Bona Fide Residence Test

a. Establishing Bona Fide Residency

b. Termination of Bona Fide Residency

c. Statement to Foreign Authorities

d. Entire Taxable Year

2. The Physical Presence Test

a. Twelve-Month Period

b. 330 Days

c. Full Day

3. Foreign Country

a. U.S. Possessions and Territories

b. Military Bases

4. Tax Home

a. Determination of Tax Home

b. Abode

c. Abode in the United States

5. Special Circumstances

a. Foreign Travel Restrictions: § 911(d)(8)

b. Waiver of Period of Stay

C. Excludible Amounts

1. The Foreign Earned Income Exclusion

a. Foreign Earned Income

(1) Earned Income

(a) Professional Fees

(b) Settlement Proceeds

(c) Research Fellowships and Stipends

(d) Sale of Artistic Property

(e) Author's Royalties

(f) Severance Pay

(g) Disqualifying Disposition of Stock Acquired Pursuant to a Qualified Plan

(h) Sick Leave Pay and Vacation Pay

(i) Gambling Winnings

(j) Renewal Commissions

(k) Guaranteed Payments to Partners

(2) Source of Earned Income

b. Amounts Not Considered Foreign Earned Income

(1) Government Employee Earnings

(a) Government Agencies and Instrumentalities

(i) Armed Forces Exchanges

(ii) Schools on U.S. Bases and Installations

(iii) The Red Cross

(iv) Federal Credit Unions

(v) The Smithsonian Institution

(vi) Tennessee Valley Authority

(b) Source of Funds

(c) Determination of Employer

(2) Payments Received in Subsequent Years

c. Attribution of Income

(1) Year-End Payroll

(2) Priority Use of § 911 Limitation

2. The Foreign Housing Exclusion

a. Housing Expenses

b. Housing Cost Exclusion

c. Housing Cost Deduction

(1) Limitation

(2) Carryover

D. Calculating the Tax on Nonexcluded Income

E. Weighing the Benefits of Claiming the § 911 Exclusions

F. Deductions, Exclusions, and Credits Allocable to Excluded Income

G. Procedural Aspects of § 911

1. Making the Election

2. Revocation

3. Reelection

H. Married Individuals

1. Foreign Earned Income Exclusion

2. Housing Cost Amount Exclusion

3. Community Property

I. Self-Employed Individuals

1. General

2. Capital as a Material Income-Producing Factor

3. Income from Partnerships

J. Resident Aliens

II. Special Situations

A. Government Employees Abroad

1. Foreign Area Allowances

2. Cost-of-Living Allowances

3. Peace Corps Allowances

4. Deductions Allocable to Income Excluded Under § 912

B. Residents of U.S. Possessions

1. Criteria for Residency in a Possession

a. Presence Test

b. Tax Home Test

c. Closer Connection Test

d. Members of the Armed Forces

2. Moving to or from a Possession; Information Reporting Requirements

C. Income from Sources Within U.S. Possessions

1. Section 933 - Income from Sources Within Puerto Rico

2. Section 931 - Income from Sources Within Guam, American Samoa, and the Northern Mariana Islands

3. Section 932 - Coordination of U.S. and Virgin Islands Income Taxes

III. The Foreign Tax Credit

Introductory Material

A. Creditable Foreign Taxes

1. Foreign Levies for Social Security, Unemployment, Disability, or Similar Benefit

2. Wealth Taxes

B. Foreign Taxes Allocable to Income Excluded Under § 911

C. Making the Election

1. Credit Versus Deduction

2. Statute of Limitations

3. Cash Versus Accrual Method

a. Cash Method

b. Accrual Method

4. Choosing the Appropriate Method

D. Translation of Foreign Taxes

1. Determining Appropriate Amount of Creditable Taxes

2. Foreign Tax Credit Redeterminations - Refunds and Adjustments to Accrued Foreign Taxes

E. Foreign Tax Credit Limitation

1. Separate Limitation Income Categories

2. Source of Income

a. Interest

b. Dividends

c. Compensation for Personal Services

d. U.S. Social Security Benefits

e. Rents and Royalties

f. Sale of Real Property

g. Sale of Personal Property

h. Alimony

i. Pension and Annuity Payments

3. Allocation and Apportionment of Deductions

4. Overall Foreign Losses and Separate Limitation Losses

5. Alternative Minimum Tax

F. Allocation of Foreign Taxes

G. Carryover and Carryback of Excess Foreign Tax Credits

1. General

2. Married Individuals

H. Simplified Procedures for Certain Taxpayers

IV. Expatriation to Avoid Tax

A. Introduction and Legislative History

1. Expatriation under the Foreign Investors Tax Act

2. The HIPAA Amendments

3. The AJCA Amendments

4. The Heroes Act Amendments

B. Individuals Affected

1. Definition of Individuals Affected

2. Exceptions

3. Acts of Expatriation

4. Net Income Tax Test

5. Net Worth Test

6. Certifying Compliance with U.S. Tax Laws

C. Determining when Expatriation Occurs and Filing Requirements

1. Filing Requirements at Time of Expatriation

2. Annual Filing Requirements

3. Transitional Relief

D. Taxation Under § 877

1. Source Rules

2. Immediate Gain Recognition for Certain Nonrecognition Transactions

a. Gain Recognition Agreements

b. Expanded 15-Year Period

3. Substantially Diminished Risks of Ownership

4. Contributions to Controlled Foreign Corporations

5. Elimination of Double Taxation

6. Coordination with § 7701(b)(10)

7. Tax Reform Act § 1277(e)

E. Restrictions on Return to the United States

1. Restrictions Under § 877

2. Restrictions Under Immigration Law

F. Interaction with Treaties

G. Estate and Gift Taxation Under § 877

H. Taxation Under § 877A

I. Estate and Gift Taxation Under § 877A

V. Income Tax Treaties

A. Overview

B. Basic Concepts

1. Residence

2. Saving Clauses

3. Elimination of Double Taxation

4. Non-Discrimination

5. Mutual Agreement

C. Specific Items of Income

1. Income from Personal Services

a. General

b. Performing Artists and Athletes

c. Students

d. Teachers and Researchers

2. Pensions and Annuities

a. Income from Pensions and Annuities

b. Pension Contributions

3. Dividends, Interest, and Other Income

D. Disclosure of Treaty-Based Return Positions

VI. Other Issues

A. Principal Residences

B. Social Security Issues

C. Short-Term Assignments

D. Moving Expenses

E. Procedural Issues - Due Dates and Extensions

F. Non-U.S. Citizen Spouses

G. Individual Taxpayer Identification Numbers

H. Estate and Gift Tax

I. State Taxation

Working Papers

Working Papers

Table of Worksheets

Worksheet 1 Legislative History

Worksheet 2 U.S. Model Income Tax Treaty of November 15, 2006

Worksheet 3 U.S. Treasury's Technical Explanation of 2006 Model Treaty

Worksheet 4 Chart of Post-1993 IRS Waivers of Foreign Residence and Presence

Worksheet 5 Annual Listing of § 911 Housing Cost Adjustments

Worksheet 6 Publication 54 - Tax Guide for U.S. Citizens and Resident Aliens Abroad

Worksheet 7 Publication 901 - U.S. Tax Treaties

Worksheet 8 Publication 514 - Foreign Tax Credit for Individuals

Worksheet 9 Section 911 Election Rules and Sample Revocation Statement

Worksheet 10 Section 911 Reelection Rules and Sample Reelection Statement

Worksheet 11 Sample Joint Return Election Statement Under § 6013(g)




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Treasury Regulations:

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