Guide to Form 673 for U.S. Expats: Exemption from Withholding
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What is Form 673?

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Form 673 is specifically designed for U.S. citizens and resident aliens who expect to qualify for the foreign-earned income exclusion under section 911 of the Internal Revenue Code

When you submit this form, you are informing your employer that due to your expected foreign-earned income exclusion eligibility, less or no U.S. federal income tax should be withheld from your paycheck.

By correctly filing Form 673, you can significantly reduce the burden of double taxation and manage your monthly cash flow better. It prevents the necessity of waiting until filing a tax return to receive a refund for over-withheld taxes.

Eligibility for Using Form 673

To use Form 673, you must meet certain criteria:

  • Expect to qualify for the foreign earned income and/or foreign housing exclusions.
  • Being a U.S. citizen or a U.S. resident alien.
  • Earn wages as an employee working abroad.

What You Need to Consider When Filling the Form 

When completing IRS Form 673 to claim exemptions from withholding on your foreign-earned income, it’s important to approach the process thoughtfully and thoroughly. Here are the key points to consider –

1. Check If You Qualify

Make sure that you actually qualify for the exemptions by meeting specific criteria, like living abroad for a certain period or earning income in a foreign country.

2. Provide Accurate Information

Estimate your foreign-earned income and any housing costs as accurately as possible. This will help in avoiding potential issues with under or over-withholding of your taxes.

3. Be Aware of Tax Treaties

Understand if there is a tax treaty between the U.S. and the country you are in, as it could impact your tax situation.

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4. Remember State and Local Taxes

Keep in mind that this form only deals with federal tax. Your state or local government might have different rules about foreign income.

5. Update As Necessary

If your income situation changes throughout the year, make sure to update the information you have provided to stay on track with the correct withholding.

6. Filing a Tax Return is Still Required

Filling out Form 673 does not exempt you from filing an annual tax return. It’s a separate requirement where you will report all your income, including what is covered by the form.

7. Consider Professional Advice

Tax rules can be complex, especially when dealing with foreign income. Seeking advice from a tax professional familiar with expat situations can be very helpful.

8. Keep Good Records

Maintain detailed records of your income, housing expenses, and days inside and outside the U.S. This documentation will support your claims and can be crucial for accurately filling out the form and your tax return.

Form 673: Key Takeaways

  • Form 673 exempts U.S. citizens and residents working abroad from federal income tax withholding on foreign-earned income and housing allowances.
  • Eligibility requires meeting the physical presence test or having a home in a foreign country for the tax year.
  • Enables exclusion of foreign earned income and certain housing costs from taxable income.
  • Does not exempt individuals from Social Security and Medicare taxes.
  • Must be submitted to the employer for withholding adjustments.
  • Requires accurate income projections and eligibility verification.
  • Tax filing and tax-due payment responsibilities remain.
  • Changes in income or eligibility must be reported to adjust withholding.
  • Important to maintain records of foreign income and housing expenses for tax filing.

Maximize Tax Benefits for Americans Working Abroad

Form 673 is a critical document for U.S. citizens and resident aliens working abroad to understand and consider. With expert financial and legal assistance from a reputed international hiring and consulting agency like Tarmack, you can navigate the complexities of tax obligations with greater confidence and efficiency.

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