Your foreign employment, while it may offer certain tax advantages upon qualifying, does not in any way excuse you from filing a federal income tax return. You must file a return and report your world-wide income whether your employer is a U.S. company with a foreign operation or whether the company is a wholly foreign entity.

Upon qualifying, you are allowed to exclude up to $70,000 per tax year of your foreign-source earned income plus limited housing costs. This deduction is not automatic. To realize the benefits, you must file your tax return and claim the exclusions on form 2555.

First and foremost is that you establish your tax home (abode) in a foreign country throughout your period of bona fide foreign residence or your test of 330 full days of foreign physical presence within a period of 12 consecutive months.

The key word is 'throughout.' For example, if you were employed in a foreign country for 10 months, then spend 1 or 2 months at leisure at another foreign location just to try to make up your 'tax time,' this would not qualify because those 1 or 2 months were not at your foreign tax home (foreign jobsite).

The location of your foreign tax home depends upon whether your assignment is:

Employment at your new foreign location of more than one year is indefinite (not temporary) regardless of other facts and circumstances and you may be able to exclude your income under the foreign earned income exclusion rules. If your foreign employment fasts for one year or less, whether your new work assignment is temporary or indefinite depends upon all the facts and circumstances in your own particular situation. (Reference: IRS Publication 54.)

Must be for an uninterrupted period which includes a full tax year January I through December 31).

Bona fide foreign residence is a concept without a definition. Although you may be allowed to claim bona fide foreign residence while living and working at a foreign construction camp on single status, the IRS and the tax courts rely on your answers to questions appearing on Part I of Form 2555 filed with your tax return. No single question or answer will make or break the determination of a claim for bona fide foreign residence.

A review of Part I shows that the questions are slanted and your claim would be more favorably considered by you:

Once the 'Full tax year" requirement is met, your exclusion of foreign earnings is computed from the date the foreign residence actually began. For example, if your foreign residence began July 1, 1996, your first full tax year is 1997. you would then calculate your exclusion beginning July 1, 1996 = half-year exclusion or $35,000 for the 1996 tax year. For 1997, with a full year of bona fide foreign residence, the exclusion would then amount to $70,000.

When your tax home is in a foreign country, this test calls for 330 full days of foreign physical presence within a period of 12 consecutive months. A full day is a period of 24 hours beginning at midnight. For example, when you depart from the United States and arrive at the foreign country at noon, the day of arrival cannot be counted because it is not a full day; your 330 days begins with the first full day foreign thereafter. The reverse is true in traveling from the foreign country returning to the United States.

When your foreign employment begins or ends in mid-year, similar to the bona fide foreign residence test, the $70,000 exclusion is pro-rated for the number of days within each tax year that you qualified. For example, assume that your foreign employment is for a two-year period from July 1, 1996 through June 30, 1998. Here is a simplified scenario:

For the 1996 tax year, your 12-month qualifying period is 7/l/96 through 6/30/97. In that 12-month period, you need 330 full days of foreign physical presence. You may then prorate your exclusion as July-December 1996 = 6 months or 50% x $70,000 = $35,000 exclusion.

For the 1997 tax year, your 12-month qualifying period is 1/l/97 through 12/31/97. You again, need 330 full days of foreign physical presence. In this case, you may exclude the full $70,000

For the 1998 tax year, your 12-month qualifying period is 7/l/97 through 6/30/98. In that 12-month qualifying period, you again, need 330 full days of foreign physical presence. You may then pro-rate your exclusion as January-June 1998 6 months or 50% x $70,000 = $35,000 exclusion.

You do not include in your income the value of meals and lodging provided to you and your family by your employer at no charge if the following conditions are met:

MEALS are furnished on the business premises of your employer for the convenience of the employer.

LODGING is (a) furnished on the business premises of your employer; (b) for the convenience of the employer; (c) a condition of employment (you are required to accept it).

HOUSING COST AMOUNT includes expenses that you paid from employer-provided amounts. A limited deduction is available for rent, utilities, repairs, insurance, occupancy taxes, non-refundable fees and residential parking.

U.S. employers generally must withhold U.S. income tax from the pay of U.S. citizens performing services in a foreign country-

try. However, withholding is not required if there is good reason to believe that you will qualify for exclusion of income up to $70,000 maximum and allowable housing cost amount. To stop withholding, you can submit a statement to your employer on IRS Form 673 indicating that you expect to meet either the bona fide foreign residence or the foreign physical presence test.

If your compensation is over the $70,000 maximum exclusion, you should submit a W-4 to your employer to cover expected tax due upon filing. This will avoid a tax trap - penalty and interest due to underpayment.

If you plan to take a foreign tax credit on your wages or salary, you may be eligible for additional withholding allowances on the form W-4.

If, after applying your $70,000 (or pro-rata for part-year) exclusion of foreign-source income and the foreign tax credit, you estimate that you will still have a tax liability, you should file and pay quarterly estimates by voucher, due April 15, June 15, September 15 and January 15. This will avoid the penalty and interest tax trap-

Most countries of the world today impose an individual income tax on their residents. Some exceptions include: Saudi Arabia, Kuwait and the United Arab Emirates. The law provides that you may not take a foreign tax credit on excluded income. So, you @Y take a foreign tax credit on income that is in excess of your $70,000 exclusion. To figure this, the foreign tax paid is reduced in proportion: foreign-source exclusion divided by total foreign-source compensation. As an example: Exclusion $70,000 divided by total compensation $100,000 = 70% reduction of foreign taxes, leaving you with 30% of your foreign taxes available for credit.

FOREIGN TAX CREDIT CARRYBACK OR CARRYOVER

After applying the reduction and having taken the allowable amount of foreign tax credit, unused amounts may be allowed as a carryback to two earlier years or forward to five years later. Don't overlook this valuable tax advantage. The value as a carryback is that it may be applied to an earlier year in another foreign country by means of a timely filed Amended Return. Or, unused amounts may be carried forward to apply to taxable foreign earnings in as many as five later years. You need experienced professional assistance to unravel the complexities of foreign tax credits.

The Alternative Tax was imposed by Congress to ensure that all taxpayers pay at least a minimum amount of tax.

While your foreign-earned income and housing amount may be excluded in arriving at income subject to the AMT, ff you have substantial itemized deductions and/or income that receives preferential tax treatment, the AMT may apply.

Alternative Minimum Tax is payable only to the extent that it exceeds the "regular t@' less 90% of the foreign tax credit.

REPORTING FOREIGN BANK, FINANCIAL & SECURITIES ACCOUNTS

Foreign-source interest and dividends and foreign securities buy and sell transactions must be reported as taxable income on your tax return, expressed in U.S. dollars. These items are reported on Schedule B and/or D, along with similar items of U.S. source.

If you had a "financial interest" or signature authority over one or more foreign accounts, additional information reporting to the U.S. Treasury Department on Form TD F/90-2.1 may be required by June 30 each year, separately from your tax return.

IRA - INDIVIDUAL RETIREMENT ARRANGEMENTS

Contributions to your IRAs are limited to the lesser of @2,000 or your compensation that is included in your adjusted gross income (AGI) for the tax year. For this purpose, reduce your compensation by the amount of your foreign earned income exclusion.

The maximum amount of your wages subject to Social Security Tax is fixed by law and is not affected by excluded foreign income under IRC Section 911. When you work for two or more United States companies during a tax year, the amount of FICA withheld from your salary from each employer may be more than the maximum for that year. TMs excess is subject to a credit or refund when claimed on your federal income tax return, if timely filed.

SOCIAL SECURITY COVERAGE WHOLLY FOREIGN COMPANY If you are employed in a foreign country by a wholly foreign-based entity, you are not subject to Social Security coverage during your period of employment with that company.

Self-payment into your Social Security account is allowed only in the event that you are self-employed (independent contractor).

An informative booklet entitled Retirement is available upon request to the Social Security Administration. Ask for SSA Publication No. 05-10035.

This statement is available upon request to the Social Security Administration. Ask for Form SSA-7004-SM-OP-2.

FORM SS-5 APPLICATION FOR SOCIAL SECURITY NUMBER - NEW ACCOUNT If you or your spouse or dependent children are applying for the first time for a Social Security Account Number: Contact the Social Security Administration and ask for Form SS-5, Application for a Social Security Number.

You are in the best possible situation if you file your returns and pay all taxes timely - by April 15. This will avoid a tax trap - penalty and interest. You may be granted an automatic extension of time to file - valid to June 15 or August 15 (with tax payment). In some cases, if you provide a good reason, a final extension to October 15 may be granted. if this is your first year of foreign employment, an extension is available to allow you time to meet the 330 days foreign physical presence test or the "full taxable year" bona-fide foreign residence requirement.

TAX TRAPS - PENALTIES & INTEREST If you like paying taxes, you will LOVE, penalties and interest assessed on balance of tax due after each April 15.

You can avoid penalties and interest by @g your tax returns by April 15 each year and by ensuring that all taxes have been paid either by withholding on your wages or by timely filing of quarterly estimated taxes.

Even if you have been granted an extension of time to file your tax returns, interest will be charged on a daily basis on taxes not paid on or before their quarterly due dates or final due date (April 15).

You must sign and date your tax returns. If you are married, filing jointly, both you and your spouse must sign the returns, even if only one had income. If you are absent from the United States, your spouse can sign the returns using your Power of Attorney. In this case, you must attach IRS Form 2848, Power of Attorney (POA).

EMPLOYEE OR INDEPENDENT CONTRACTOR?

If you have been issued a Form 1099 - Misc. that shows at Box 7 "Non-Employee Compensation," it is important that you know and understand the distinction between an employee and an independent contractor. The 20 common law factors that help show the difference between employees and independent contractors may be commented upon as follows:

You are usually an employee if your employer directs and controls what is done on the job and how it is done. Even if you are allowed freedom of action, the fact that your employer has the right to control and direct your work makes you an employee. If your employer supplies the tools and a place to work and has the right to fire you, that also shows an employer-employee relationship.

As an employee, your one-half share of Social Security and Medicare taxes are figured on IRS Form 4137, attached to your tax return.

Independent contractors are people who work for themselves in a trade, business or profession in which they offer their services to the public. Lawyers, accountants and builders are examples of independent contractors. As self employed individuals, independent contractors report their income and expenses on Schedule C. In addition to income tax figured on net earnings, individual contractors are liable for both the employer + employee Social Security & Medicare self employment taxes.

As a result of your overseas assignment, you may decide to rent out your personal residence in the States during your absence, in addition to any other rental properties maintained for investment and income purposes. When your home is rented out for only part of the year, you must maintain accurate records to distinguish between the owner-occupied portion and the amount pertaining to true rental. AU rental receipts for the year must be reported on your income tax return and the corresponding expenses, including depreciation, are deducted from the gross rental income. The net result is either income or a loss and is reported in detail on your tax return.

You should keep records that will enable you to prepare a complete and accurate income tax return. Although the laws do not specify any special forms of records, you should retain, for at least three years, all receipts, canceled checks and other evidence to prove amounts claimed as deductions. On your Form 2555, to verify your travel dates to and from the United States, a well-maintained personal diary is a "must," along with your travel documents (tickets, etc.)

Your state of residence or domicile remains during your temporary absence on foreign assignment. State taxes, if any, are figured on your world-wide income less foreign exclusion where allowed. Forty-one states and the District of Columbia impose an individual income tax based on wages. Seven

states have no individual income taxes: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. The states of New Hampshire and Tennessee impose an individual income tax based on interest and dividends only Six states do not allow your $70,000 foreign-source exclusion: Alabama, Hawaii, Massachusetts, Mississippi, New Jersey and Pennsylvania.

"Residence," for state individual income tax purposes, is not the same as bona fide foreign residence for federal income tax purposes. Here is a brief description of legal residence (domicile) for state individual income tax purposes.

TAX ALERT - LATE FILERS & MON-FILERS

The IRS has embarked upon a world-wide program, known as Compliance 2000, designed to bring late filers and nonfilers into compliance.

If you are in a late-filing situation, it is essential that you come forward before the IRS seeks you out.

PERSONAL FINANCIAL PLANNING- & INVESTMENT PORTFOLIO MANAGEMENT Although closely related in many areas, your tax return preparation is not the same as your overall personal financial planning and your investment portfolio management. To assist you in identifying and achieving your lifetime financial goals,

consult a Certified Financial Planner (CFP).

To locate a Certified Financial Planner in your area, you may contact:

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When you see the designation "E.A. " you may be assured that you are working with a tax professional Enrolled Agents are individuals who have demonstrated technical competence and professional ethics to the Treasury Department and have been granted enrollment to practice before the Internal Revenue Service. In addition to having initially passed the IRS Special Enrollment Examination, E.A. s are required each year to complete continuing professional education (CPE) to maintain their status.

For more information contact:

James R. Thosen, EA

THOMSEN TAX SERVICE (http://1pcc.com/tax