Jeffrey Strain takes a look at what US citizens need to do in order to properly file last year's taxes

Sitting in a restaurant talking with a friend, he mentioned one of the great things about living in Japan was that he no longer had to deal with US taxes. When I asked exactly what he meant he said, "You know, when you live overseas you don't have to pay any taxes. I haven't filled out a tax return in years." He couldn't have been more wrong. There continues to be a misconception that those living overseas who earn less than $74,000 a year don't need to file a US tax return. This is not only false, it can potentially cost you a lot of money, and even land you in federal prison.

Those living abroad are entitled to the first $74,000 dollars they earn overseas free of US federal taxes only if they file a tax return. If you fail to file a tax return you lose your $74,000 exemption and you'll be required to pay taxes on your entire earnings in Japan in addition to plenty of late and penalty taxes. Even if you know you won't owe the Internal Revenue Service (IRS) a cent because of the $74,000 exemption, you still must file a return to receive it.

For those whose entire income comes from Japan, filling out your tax return will be quite simple. As long as you made less than $74,000 in 1999, you simply convert your total salary from yen to dollars, plug in a positive number on line 7 and the same amount as a negative number on line 21 of the 1040 long form. After completing the rest of the tax form you'll find you won't owe any taxes.

Most people have, however, other income from back home. All income you receive from the US including earnings, interest, dividends and capital gains are fully taxable, and aren't eligible under the $74,000 foreign income exemption. However, as long as the total amount of income you have from the US is under $6800, ($12,200 if married) you still won't owe Uncle Sam a penny.

To receive your $74,000 exclusion, you must fill out Foreign Earned Income Form 2555 or 2555EZ. If you lived in Japan the entire 1999 year, then you should fill out the Bona Fide Residence Test to claim your exclusion. If you came to Japan in midyear, then you'll need to fill out the Physical Presence Test.

Those who live abroad receive an automatic two month extension for filing their taxes, but those filing the Physical Presence Test may need an extra two-month extension in addition to this automatic extension. In this case you will need to submit Form 4868 Request For Extension which must be postmarked before June 15.

For those who maintain one or more bank accounts with a combined total balance of $10,000 or more any time during the tax year, you are required to file a Report of Foreign Bank and Financial Accounts (form TD F 90-22.1) with the US Department of Treasury. This form is filed directly to the Treasury Department and not with your tax return, but it can carry numerous tax related penalties if not submitted. You can request this and all other federal tax forms from the US Embassy at 03-3224-5466.

Just because you file for an extension or take the automatic extension for living abroad doesn't excuse you from paying any taxes you owe the IRS by April 15. If you don't have all the information you need to file your tax return, you still need to estimate what you'll owe and send that money to the IRS postmarked by April 15. It's advisable to guess on the high side so you don't incur any late penalties. You'll receive a refund for any amount you overpay when you submit your final return.

Reproduced by permission of Kansai Time Out.