US citizens and resident aliens living in Bermuda should be currently reviewing their 1996 income and deductions, as two US income tax deadlines are fast approaching: April 15, 1997 This deadline is important for three categories of taxpayers. While US citizens residing in Bermuda have until June 15, 1997 to file their 1996 US Federal individual income tax return, any tax that is due with the return must be paid by April 15. Failure to pay this tax by April 15 will result in penalties and interest being incurred. If a payment is due, we would suggest that you file Form 4868, which automatically extends the time for you to file your return until August 15, 1997, and pay the tax with this form. Why use a Form? The IRS personnel operate more efficiently with Forms that they are familiar with. You can just write the IRS a letter and enclose a cheque, but this will increase the chances of error. Once the IRS has made a computer error and miscoded a payment, hours will be spent undoing the error. Be sure to put your social security number on the cheque and the notation, 1996 Form 12040-balance due.

As there is no US Federal income tax withheld for US citizens working for a Bermuda entity, it is necessary for you to make quarterly estimated payments.

The first payment of your 1997 estimated taxes is due on April 15, 1997. To avoid being subject to a penalty for underpayment of income tax in 1997, your income taxes withheld and estimated taxes paid must be at least 90 percent of the current year's tax liability, or 100 percent of the 1996 tax if adjusted gross income is $150,000 or less, or 110 percent of the 1996 tax if adjusted gross income exceeded $150,000. This "safe harbour'' rule is only applicable to the underpayment penalty which runs from April 15, 1997 to April 15, 1998.

If any tax is due with your 1997 return, it will be subject to a small amount of interest and penalty if paid after April 15, 1998. Form 1040-E'S should accompany the cheque, your social security number should be on the cheque, and the notation 1997 form 1040 E'S, first quarter payment noted on the cheque.

If you first came to live in Bermuda to work/reside in 1996, and expect to qualify for the Foreign Earned Income exclusion of $70,000 during 1997, you will need to file Form 2350 requesting an extension of time in which to file your 1996 return until you meet the exclusion. You will probably have to request an extension until January 30, 1998. Any balance due on your 1996 return can be made with this form.

June 15, 1997 This is the due date for filing your 1996 Form 1040 for most US citizens living in Bermuda. Most Bermuda employers will not provide you with a Form W-2 at year end. Proof of your earnings could be in the form of the last pay stub for 1996 with year to date earnings noted thereon. If neither document exists, we would suggest that you ask your employer for a letter stating your compensation for 1996, just in case the IRS asks at a later date. If your employer is furnishing you with a housing allowance, or housing assistance, this amount must be included in taxable income.

If you have an investment account with a local broker, you will probably not receive a year end statement summarising your 1996 investment income. But you do have an obligation to report this income to the IRS.

The second estimated tax payment must also be made on June 15.

Foreign Earned Income Exclusion You can qualify for the foreign earned income exclusion by meeting one of two tests. The first test is rather straightforward. You must be a bona fide resident of a foreign country for a full calendar year. Thus, if you came to Bermuda during 1996, and expect to be residing here on December 31, 1997, you will meet this test. The number of days you spend in the United States during 1997 will not affect this test.

If you do not meet the above test, the second test is more difficult to meet.

The physical presence test requires that you be physically present outside the United States for 330 full days (24 hours) out of 365 days. The confusing rule is that it can be any 365 days. For example, suppose you came to Bermuda on June 1, 1996, went back to the United States from July 1 to August 15, and will be in Bermuda until September 1, 1997. If you start counting forward 330 days from June 1, 1996, you will flunk the test because you had 46 days in the US during this period. However, if you start counting on August 16, 1996, your 330th full day will be July 11, 1997. You then count backwards 365 days and you come to July 12, 1996. This is considered the first day that you qualify for the foreign earned income exclusion.

Foreign Housing Exclusion To the extent that your 1996 housing costs in Bermuda exceed $9,242, you can claim an additional exclusion. Included in your housing costs are rent, utilities (except for telephone), insurance, repairs, maintenance, furniture rental, alarm systems, and local taxes. Don't overlook this exclusion.

Foreign Tax Credit Bermuda is viewed as a tax free haven. However, the Government does impose local taxes on income, though they are not labelled as such. If your local employer passes a portion of these taxes on to you, which is allowable under local law, you can use these taxes as a foreign tax credit to reduce your US income taxes.

The tax advice given in this column is, by necessity, general in nature. You should, of course, check with your own US tax consultant about how specified transactions affect you since tax advice varies with individual circumstances.

James Paul Sabo, CPA, is the President of Expatriate Tax Service, PO Box 617, Bernardsville, New Jersey and is associated with GulfStream Financial Ltd. in Bermuda.

BUSINESS BUC