Expat Taxes

Tax Exclusions for U.S. Citizens Working Abroad

Tax Exclusions for U.S. Citizens Working Abroad

Taxes on income are a fact of life, whether you are a citizen of the United States or a resident alien and regardless of whether you are living inside the country or abroad. That being said, certain individuals may qualify for income tax exclusions on foreign salary or wages that they receive or on compensation that they receive for personal services provided when they live and work outside of the country. There are also exclusions and deductions that can be taken for foreign housing costs that they incur as part of their living expenses while working abroad.

There are specific requirements that must be met for U.S. citizens or resident aliens to qualify for a foreign earned income tax exclusion. These exclusions are:

  • Their income must be a result of working in a foreign country (foreign earned income.)
  • The foreign country must be your tax home. This means that it is your main place of business, employment, or post of duty, for a permanent or indefinite period of time.
  • They must be able to meet the requirements of either the bona fide residence or physical presence test.

 For tax year 2015, the foreign earned income exclusion amount is $100,800 per qualifying person. This amount is inflation-adjusted each year. A married couple in which both spouses are working abroad and meet the bona fide residence or physical presence test can exclude up to $201,600 for tax year 2015, though there is no requirement that both or either chooses the foreign earned income exclusion. It is important to note that if either spouse uses less than their maximum exclusion, the other spouse is not able to use the unused amount.

U.S. citizens and resident aliens who are working abroad and who qualify as described above are also able to either deduct or exclude from their taxes a foreign housing amount. This deduction or exclusion is generally thirty percent of the maximum foreign earned income exclusion, though there are variables on the limit based upon the number of days of the tax year that the qualifying individual was located in the foreign country, and the foreign country itself. The housing amount limitation for the year 2015 is $30,240.00. It is important to remember that the foreign housing amount that can be deducted or excluded needs to be subtracted from the actual foreign earned income, thus reducing the total amount that can be taken for the foreign earned income exclusion. This means that individuals need to calculate their foreign housing amount first and deduct it from their foreign earned income in order to determine the amount of the foreign earned income exclusion for which they will apply.

Though these exclusions are attractive, they are not available to every U.S. citizen or resident alien working abroad. The following are excluded from these tax breaks:

  • Income received from the U.S. government or any of its agencies, whether received as a civilian employee or a member of the military.
  • Income received for services rendered in international waters rather than on the land of a foreign country.
  • Income received for services rendered within the area of specific combat zones. These zones are designated by Presidential Executive Order.
  • Income received beyond a specific time limitation. This limitation is defined as after the last day of the tax year following the tax year in which the services for which the income is being paid were provided.
  • Social security benefits, pension payments, and annuity payments.
  • Any cost assessment for food and lodging provided by the employer but excluded from income.

The allowances for claiming the foreign earned income exclusion are also available to those who earn self-employment income in a foreign country if they meet al of the qualifications. These individuals are able to use the exclusion to reduce their regular income tax and are also able to claim the foreign housing deduction. They are required to pay the full amount in self-employment taxes, and are not eligible for the foreign housing exclusion.

When calculating their taxes, qualifying individuals must remember several important points. Though they can claim either or both of the foreign earned income exclusion and the housing exclusion, any income that exceeds the exclusion maximum or does not qualify for the exclusion must be paid at the tax rate that would have been appropriate prior to taking the exclusions - the balance is paid at the full tax rate, not the net tax rate. Also, if you choose to tax the foreign earned income exclusion you are not eligible to also take a foreign tax credit or a deduction for the income on which you have claimed an exclusion. Doing so will result in a revocation of the foreign earned income exclusion.

It is also to remember that if you choose to claim a foreign earned income exclusion, you are not eligible to claim an earned income credit. The timing of your choice in taking a foreign earned income exclusion is also important. It must be done in one of the following ways:

  • On an income tax return filed by the due date, or the due date of an extension if it has been taken.
  • On an amendment to an income tax return that was filed by the appropriate due date or due date of an extension.
  • On an income tax return filed within a year of its original due date.

If you are filing an amended return, in order for it to qualify it must either be filed by either two years after the taxes have been paid, or three years after the filing date of the original return, whichever is later.

If you are a qualifying individual and you choose to revoke an election to claim a foreign earned income exclusion, you can do so for any year by simply submitting a copy of that year's tax return along with a statement revoking the choice that you previously made. A revocation of a foreign earned income exclusion must be made separately from a revocation of a foreign housing exclusion, and each must be specifically stated on the statement(s) submitted. Once you've revoked an exclusion election, you can change your mind again within five years by applying for approval to the IRS.

If you are interested in learning more about how a foreign earned income exclusion may apply to your particular situation, please contact us for more information.

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Lee Reams, BSME, EA

Lee Reams, BSME, EA

Editor-in-Chief

Besides his role at CountingWorks as an educator and speaker to thousands of accountants nationwide, Lee manages a technical research service for a large group of tax accountants which sharpens his technical skills. Lee served on the Board of Blackline Systems, is a former Board of Director for the California Tax Education Council, is a Past President of the San Fernando Valley Chapter of Enrolled Agents, Member and Past Director for the California Society of Enrolled Agents.

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