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I work overseas for a US company. Because of this, I qualify for the foreign earned income exclusion.

Each year at this time I file a new W-4 with my company and a form 673. The result is that no taxes are withheld from my paycheck. I claim the foreign earned income exclusion using form 2555 each year when I file taxes. I pay no taxes and I get no refund. It has been pretty simple, until now.

This past year, due to the falling dollar and increase in the company housing allowance, I will actaully owe some taxes, around $2,000. I thought this wasn't that big a deal, but I just ran across a huge problem as I was doing my new 673 and W-4 for 2005.

Normally I am able to claim "EXCEMPT" status on line 7, and no taxes are withheld. This year, if I answer question 7 truthfully stating that I actaully paid some taxes in 2004, I no longer qualify for "EXCEMPT status, meaning I'm going to have taxes withheld.

The problem is I can't figure out if there is a way to have taxes withheld only on my income that exceeds the foreign earned income exclusion and qualifying housing costs (over 80K).

If I do the W-4 like normal working folks back in the states, I'm estimating that I'm going to have almost $20,000 withheld, but when I file for 2005, I will still only have a tax liability of $2,000 or so.

I still qualify for the income exclusion on the 673, but that is mearly just a statement that my employer can choose to use or not. My company seems to be looking for the "EXCEPT" line on the W-4, otherwise I'm having withholding taxen out on all my income.

I'd rather not let the IRS have 18K of my money to play with in 2005, just to get it back next spring. Is there any way to get around this? I've looked through all the IRS publications referenced on form 673 and form W-4 and I can't find anything that remotely applies.

I'm scheduled to talk to my payroll folks on Monday, but I'm not sure I will know what to really tell them. I'd like to call in armed with some knowledge. I'm not sure anyone here can really help, but I thought I would give it a shot. I'm hoping there is a simple solutions.

My next plan is to find a tax specialist who understands the rules for withhold and foreign earned income.

Any ideas or suggestions would be greatly appreciated.


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