Individuals Abroad

For the most part, U.S. scholars and teachers abroad are taxed like those living in the United States. You determine the tax treatment of a scholarship or fellowship under the rules discussed earlier. A payment for services, such as teaching or lecturing, is taxable. This includes cash paid to you for transportation expenses and the value of transportation provided by the grantor.

If your scholarship or fellowship is taxable, special rules apply to :

• Reporting income,
• Deducting expenses,
• Paying U.S. income tax, and
• Paying foreign taxes.

Reporting Income

You must report all income on a U.S. federal income tax return in U.S. dollars. If part or all of your income is in foreign currency, you must report this income in U.S. dollars at the rates of exchange in effect when you received the income. You should use the rate that most nearly reflects the value of the foreign currency--the official rate, the open market rate, or any other appropriate rate. You must be able to justify the rate you use.

A special rule applies if the income is paid in nonconvertible foreign currency. See Blocked Income, later.

Foreign Earned Income Exclusion

You may be able to exclude foreign earned income from your gross income if your tax home is in a foreign country and you are:

• A U.S. citizen and a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year,
• A U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year, or
• A U.S. citizen or a U.S. resident alien and are physically present in a foreign country or countries for at least 330 full days in 12 consecutive months.

In addition, you may qualify to exclude or deduct a foreign housing amount.

Tax home. Your tax home is the general area of your main place of business, employment, or post of duty, regardless of where you maintain your family home. Your tax home is the place where you permanently or indefinitely work. You are not considered to have a tax home in a foreign country for any period in which your abode is in the United States. Your abode can be your home, habitation, residence, domicile, or place of dwelling. If your tax home remains in the United States while you are abroad, you will not qualify for the foreign earned income or housing exclusions or the foreign housing deduction. But you may be able to deduct your away-from-home expenses (for travel, meals, and lodging). See Deducting Expenses, later.

More information. For more information on tax home, the foreign earned income exclusion, and the foreign housing exclusion and deduction, see Publication 54.

Blocked Income

There may be cases in which a scholarship or fellowship grant is made in a foreign currency that is not convertible into U.S. dollars or into other money or property that is convertible into U.S. dollars because of:

• Restrictions imposed by the foreign country,
• An agreement with the United States, or
• The terms and conditions of the U.S. Government grant.

This nonconvertible income is commonly called blocked or deferrable income.

How to report. There are two ways to report blocked income:

1. Report the income and pay your federal income tax with U.S. dollars that you have in the United States or in some other country, or
2. Defer reporting the income until it becomes unblocked. Any expenses related to the income must also be deferred.

Defer reporting. If you choose to defer reporting the income, you must file with your federal income tax return an information return on a separate Form 1040 labeled "Report of Deferrable Foreign Income, pursuant to Rev. Rul. 74-351." You must declare on the information return that you will include the blocked income in your gross income when it becomes unblocked. You also must state that you give up any right to claim that any part of the blocked income was includable in income for any earlier year.

All amounts reported on the information return must be reported in the foreign currency involved. If you have blocked income from more than one foreign country, include a separate information return for each country.

Your choice to defer reporting income cannot be changed without the consent of the IRS. Use Form 3115, Application for Change in Accounting Method, to request a change.

Income becomes unblocked and reportable for tax purposes when any of the following happen.

1. It becomes convertible.
2. It is converted into dollars or into other money or property that is convertible into U.S. dollars.
3. You use blocked income for your nondeductible personal expenses.
4. You dispose of it by gift, bequest, or devise.

Deducting Expenses

If your grant for lecturing or teaching abroad is wholly taxable, you can deduct your ordinary and necessary business expenses. Ordinary and necessary business expenses include your away-from-home expenses (travel, meals, and lodging) if you are temporarily away from your tax home in the United States. Your expenses do not include the expenses of anyone accompanying you. Generally, you are considered to be temporarily away from your tax home if you expect your stay abroad to last, and it does last, for one year or less. For details about these expenses, including whether your stay is temporary, see Publication 463, Travel, Entertainment, Gift, and Car Expenses.

Payment of Foreign Taxes

The United States has income tax treaties with certain countries. Under these treaties, the citizens and residents of the United States are exempt from foreign income taxes on certain amounts received while they are temporarily in a treaty country. The kinds of income that may be exempt by treaties include:

• Certain pay for personal services performed by a U.S. citizen or resident temporarily present in a treaty country,
• Wages of U.S. professors, teachers, and researchers who teach or do research in a treaty country, and
• Certain remittances, grants, allowances, and awards received by U.S. students, apprentices, and trainees who are studying in a treaty country.

For more information on these tax treaty provisions, get Publication 901. Although Publication 901 is written for foreign nationals receiving income from U.S. sources, treaty provisions are generally reciprocal, applying equally to U.S. citizens or residents deriving income from foreign sources.

Payment of U.S. Income Tax

You must pay any income tax due with U.S. dollars. This rule may not apply to the tax on a Fulbright grant that was paid in nonconvertible foreign currency, as explained later.

Formula to Determine Estimated Tax That May Be Paid in a Nonconvertible Foreign Currency

Credit or deduction for foreign taxes paid. If income taxes are imposed on you by a foreign country, you may be entitled to take either a tax credit or a tax deduction on your U.S. income tax return. Usually, it is to your advantage to claim the credit, which you subtract directly from your U.S. tax liability. Get Publication 514.

Payment of Tax by Fulbright Grantees

As explained earlier, all income must be reported in U.S. dollars. In most cases, the tax must also be paid in U.S. dollars. If, however, at least 70% of your entire Fulbright grant has been paid in nonconvertible foreign currency (blocked income), you can use that currency to pay the U.S. tax, but only the part that is on the blocked income.

Paying U.S. tax in foreign currency. To qualify for this method of payment, you must prepare a statement that shows the following information.

1. You were a Fulbright grantee and were paid in nonconvertible foreign currency.
2. The total grant you received during the year and the amount you received in nonconvertible foreign currency.
3. At least 70% of the grant was paid in nonconvertible foreign currency.

The statement must be certified by the U.S. educational foundation or commission paying the grant or other person having control of grant payments to you.

You should prepare at least two copies of this statement. Attach one copy to your Form 1040 and keep the other copy for identification purposes when you make a tax deposit of nonconvertible foreign currency.

Figuring actual tax. When you prepare your income tax return, you may owe tax or the entire liability may have been satisfied with your estimated tax payments. If you owe tax, figure the part due to (and payable in) the nonconvertible foreign currency by using the formula in Table 3.

1. Substitute actual amounts for estimated amounts.
2. Subtract estimated tax payments from the part of your actual tax payable in nonconvertible foreign currency.

You must attach all of the following to the return.

1. A copy of the certified statement discussed earlier.
2. A detailed statement showing the allocation of tax attributable to amounts received in foreign currency and the rates of exchange used in determining your tax liability in U.S. dollars.
3. The original deposit receipt for any balance of tax due that you paid in nonconvertible foreign currency.

Figuring estimated tax on nonconvertible foreign currency. If you are liable for estimated tax (discussed later), figure the amount you can pay to IRS in nonconvertible foreign currency using the formula in Table 3.

If you must pay your host country income tax on your grant, subtract any estimated foreign tax credit that applies to your grant from the estimated tax on the blocked income.

Deposit of foreign currency with disbursing officer. Once you have determined the amount of the actual tax or estimated tax that you can pay in nonconvertible foreign currency, deposit that amount with the disbursing officer of the Department of State in the foreign country in which the foundation or commission paying the grant is located.

Estimated tax installments. You may either deposit the full estimated tax amount before the first installment due date or make four equal payments before the installment due dates. See When to pay estimated tax, later. If any of these dates falls on a Saturday, Sunday, or legal holiday, the due date is the following business day.

Deposit receipt. Upon accepting the foreign currency, the disbursing officer will give you a receipt in duplicate. The original of this receipt (showing the amount of foreign currency deposited and its equivalent in U.S. dollars) should be attached to your Form 1040 or payment voucher from 1040-ES. Keep the copy for your records. Mail the return or your payment voucher to the Internal Revenue Service Center, Philadelphia, PA 19255-0002, U.S.A. Allow enough time for the receipt to be received by the due date for your return or for the payment of estimated tax.

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