Tax Benefits of Working Overseas
- Foreign Earned Income Exclusion
- Physical Presence Requirement
- Bona Fide Resident Requirement
- Partial Year Proration
- Foreign Housing Exclusion
- Other Tax Considerations
If you have the skills needed for foreign employment and don’t mind being away from the States for an extended period of time, you might want to take advantage of a tax provision that allows you to exclude from tax a considerable amount of earned income from foreign employment.
Generally, U.S. citizens and resident aliens are taxed on their worldwide income. However, a provision of the tax code allows a portion of your foreign earned income and part of your foreign housing costs to be excluded from income. You must be living and working in a foreign country with a tax home in a foreign country. You must be either physically present in a foreign country or countries for 330 full days during any consecutive 365 day period or qualify as a bona fide resident of the foreign country. And lastly, you must file form 2555 with your US tax return .
The maximum foreign earned income exclusion for 2016 is $101,300. If both you and your spouse (if married) meet the requirements, you each can exclude up to $101,300 from your separate foreign earned incomes. Generally, your first and last year of living and working in the foreign country will not be full years, in which case the exclusion is prorated for the number of days in the foreign country.
Example: Jack, a U.S. citizen, began working in Iraq during 2016, and he meets the physical presence test. He was present in Iraq for 190 days in 2016. His foreign earned income for 2016 was $90,000. His prorated exclusion for 2016 is the lesser of his earned income or $52,587 ($101,300 x 190/366).
You may also be able to exclude your housing costs by the amount the housing costs exceed $16,208 but not exceeding $14,182 for the year. For partial years, the amount is prorated by the day. Higher amounts are allowed in certain high-cost locales. These are the inflation-adjusted amounts for 2016 and are based on a fixed percentage of the annual exclusion limit.
For purposes of the exclusion, housing expenses are those reasonable expenses paid or incurred during the tax year by the individual's employer on behalf of the individual for housing for the individual (and, if they reside with him, for his or her spouse and dependents) in a foreign country. The total of the foreign earned income exclusion and the housing cost exclusion may not exceed your foreign earned income.
The above is an overview of the foreign earned income and housing cost exclusions. If you are contemplating foreign employment, you also need to factor in taxes that may be imposed by the foreign country in which you will be employed. (The foreign taxes may be used to reduce your US income tax.) You furthermore need to consider if a US state will impose tax on you as a resident or non-resident.
Please contact this office at 913-712-8539 to learn more details related to the foreign income exclusion, whether you qualify for these exclusions, and the tax consequences.
Watch our video for more information about the Foreign Earned Income Exclusion.