AIARC > U.S. Taxpayer

Eligibility

This section is only applicable to U.S. Taxpayers.

If you are a U.S. citizen or resident alien living outside the United States, your worldwide income is subject to U.S. income tax, regardless of where you live. Taxes must be paid as you earn or receive income during the year, either through withholding or estimated tax payments. If you did not pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax. Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the tax return for the prior year, whichever is smaller. Please refer to the Internal Revenue Service Publication 505, Tax Withholding and Estimated Tax for additional information.

In accordance with the payroll processing agreement with your Center, AIARC will withhold federal income taxes excluding FICA from your monthly pay during the year based on the information submitted by you in Forms W-4, 673, and Salary Reduction Agreement (SRA) (see descriptions of the forms below) at the beginning of the calendar year. These forms allow you to manage the tax amount withheld from your monthly pay. If AIARC does not receive the completed forms at the time of your payroll enrollment, AIARC will withhold taxes as if you are single with no withholding allowances, in accordance with the guidelines of the Internal Revenue Service (IRS).

The general purpose of each form is described below:

Form W-4 – Employee's Withholding Certificate

Use IRS Form W4 to help determine the appropriate level of federal tax withholding for the year or use this form to claim “exempt” from withholding altogether. This form is divided into five steps, reviewing your marital status, number of dependents, etc. Depending on your circumstances, steps two through four may or may not apply to you. For information about Form W-4, please refer to the Frequently Asked Questions on the IRS website. In order to keep your “exempt from withholding” status, you must complete a new form every year as required by the Internal Revenue Service.

Form 673 – Statement for Claiming Exemption from Withholding on Foreign Earned Income

Use Form 673 to determine if you are eligible for an exemption from U.S. income tax withholding on wages earned abroad because of the foreign-earned income exclusion and the foreign housing exclusion. For more information, refer to figure 4 A on page 12 of Publication 54.

This form will guide you through two tests to establish your eligibility for this exemption – the bona fide residence test or the physical presence test. For more information, refer to pages 13 through 15 of Publication 54.
This form will also guide you in estimating the amount of your exclusion from taxable income, which relates to foreign earned income and foreign housing costs.

AIARC will use the information in this form to adjust monthly withholding from your pay to account for these two exclusions from taxable income. You are required by the Internal Revenue Service to complete this form each year. For information about foreign income exclusions, please refer to the Internal Revenue Service Publication 54 , Tax Guide for U.S. Citizens and Resident Aliens Abroad. In the FAQ section on AIARC's website, refer to the question “How do I estimate the amount of the foreign housing exclusion that I can take?” to find the dollar limits for the exemptions and review a sample calculation for the housing exclusion.

Sec. 403 (b) Salary Reduction Agreement Form

You may be able to reduce your taxable income by making voluntary (employee) contributions to the 403 (b) U.S. Retirement Plan. Use the SRA Form to authorize a new voluntary contribution or to confirm a continued voluntary contribution from your monthly pay. For 2024 voluntary contributions are limited to $23,000 for employees under age 50 and $30,500 for employees aged 50 and above. Based on the information that you provide, AIARC will perform the maximum contribution tests to determine if your requested voluntary contribution amount will exceed the allowable limit. For more information about the 2024 limits on retirement contributions, please refer to the Internal Revenue Service Website. In the FAQ section of this website, you can find the limits for the retirement contributions.

If you have any doubt about your eligibility for exemption or about the appropriate withholding for you, it is recommended that you seek professional tax advice.

Please note that if the Internal Revenue Service issues a notice to AIARC to withhold taxes for a specific amount and/or timeframe because the Internal Revenue Service has determined that you have not submitted the appropriate tax withholding, AIARC will comply with the Internal Revenue Service notice. It will be your responsibility to resolve any withholding or tax issues directly with the Internal Revenue Service.

Forms

Other Information

U.S. taxpayers living abroad may find useful financial and tax-related information at the links below:

U.S. Taxpayer

Frequently Asked Questions

The following are frequently asked questions about completing the various forms.

Which of the three (3) forms do I need to send to AIARC?
Each year, you must complete and return the following three forms: (1) Form W-4, (2) Form 673, and (3) 403(b) SRA Form. These forms will help AIARC estimate the appropriate tax withholding in accordance with the guidelines issued by the Internal Revenue Service (IRS).

When should I write “exempt” on my W-4?
You can only claim exemption from withholding if you meet both of the following conditions: (1) you had no federal income tax liability in the prior year and were refunded all of the federal income tax withheld and (2) you expect to have no federal income tax liability in the current year. Please understand if you choose “exempt” from withholding and you owe taxes for that year, in the following year the Internal Revenue Service (IRS) may instruct AIARC to withhold tax without consideration of the foreign earned income exclusion for a specific amount and/or timeframe because the IRS has determined that you, as a U.S. taxpayer, did not have the appropriate amount of tax withheld. Please note that AIARC will comply with the IRS notice until you directly resolve any withholding or tax issues with the IRS. AIARC will continue to withhold tax according to the IRS’ instructions until AIARC receives a release notice from the IRS. If you are claiming “exempt”, write “exempt” on Form W-4 in the space between Step 4 (c) and Step 5. Then, complete only Steps 1a, 1b, and 5, and sign the form to validate it. (Do not complete any other steps).

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 Form W-4 be completed each year to claim the exemption. Please note that if you had a federal income tax liability for the prior calendar year, you cannot claim “exempt” for this current calendar year. If you do not complete a new Form W-4, AIARC will withhold taxes as if you are single with no adjustments for deductions, in accordance with the guidelines issued by the Internal Revenue Service.

Why is Form 673 important?
Your signed Form 673 is your legal declaration that you meet the criteria established by the Internal Revenue Service to qualify for the foreign earned income exclusion and the foreign housing exclusion. If you qualify under either the Bona Fide Residence Test or the Physical Presence Test for calendar year 2024, you may exclude up to $126,500 of your foreign earnings on your 2024 tax return. In addition, you may be eligible to take the foreign housing exclusion if your housing expenses are expected to be at least $20,240 (the minimum floor amount). If your total housing expenses are expected to exceed $37,950 (the maximum ceiling amount, unless you live in a high-cost locality), the maximum amount that you will be able to exclude is $17,710, which is the difference between the maximum ceiling amount of $37,950 and the minimum floor amount of $20,240. Please refer to the below 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 2024’s maximum exclusion amounts, to be eligible for the foreign housing exclusion your total housing costs must be greater than the base amount of $20,240 (the minimum floor amount). The general allowable maximum amount (the ceiling) of housing that can be included in calculating the exclusion is $37,950. However, if you live in a high-cost locality, you may be able to use a higher limit than the general allowable maximum of $37,950. Please refer to the Instructions for Form 2555 on the Internal Revenue Service 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 allowable maximum amount (ceiling) of $37,950:

If your total housing costs are estimated at:	10,000	15,000	20,000	25,000	30,000	35,000	40,000	50,000
Are you eligible for the exclusion?	N	N	N	Y	Y	Y	Y	Y
Are you above the maximum amount?	n/a	n/a	n/a	N	N	Y	Y	Y
Use lower of Actual or Maximum housing amount	-	-	-	25,000	30,000	35,000	37,950	37,950
Less base housing amount	-	-	-	(20,240)	(20,240)	(20,240)	(20,240)	(20,240)
Your foreign housing exclusion is:	0	0	0	4,760	9,760	14,760	17,710	17,710

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 2023 Limits on Housing Expenses in Instructions for Form 2555 to estimate the limit for 2024, your maximum amount would be $39,100 rather than the general maximum of $37,950 because Lima, Peru is considered a high-cost locality. Therefore, if your total housing costs were $40,000, your foreign housing exclusion would be $18,860 ($39,100-20,240) versus $17,710 in the above example.

What can I include as housing expenses in the calculation?
As indicated in Internal Revenue Service Publication 54, Foreign Housing Expense is defined as reasonable expenses paid or incurred by you for housing in a foreign country for you and your spouse and dependents during the period for which you claim a foreign housing exclusion or deduction. Examples of legitimate housing expenses include:

Rent,
Fair rental value of housing provided in kind by your employer, (which is also reported as a taxable fringe benefit on your W-2)
Repairs,
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 2024 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 $345,000 per year;
Rule #2 - Voluntary contributions must be no more than $23,000 (if 50 or older or will turn 50 by the end of 2024, you can make $7,500 in catch-up contributions for a maximum total of $30,500).
Rule #3 - Employer contributions plus voluntary contributions must be no more than $69,000 (if 50 or older or will turn 50 by the end of 2024, your total contribution maximum is $76,500).

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.