U.S. citizens and resident aliens tax based on their worldwide income. Whether the person lives inside, or outside of the U.S.
However, qualifying U.S. citizens and resident aliens who live and work abroad may be able to exclude from their income all/part of their foreign salary or wages. Also, amounts received as compensation for their personal services.
In addition, they may also qualify to exclude or deduct certain foreign housing costs.
Article Highlights:
- Tax-Free Income from Working Abroad
- Foreign Earned & Housing Exclusions
- Foreign Self-Employment Income
- Claiming or Revoking the Exclusion
To qualify for the foreign earned income exclusion, a U.S. citizen or resident alien must:
- Have a tax home in a foreign country; and
- Have foreign earned earnings;
- Meet either the bona fide residence test or the physical presence test.
The foreign earned income exclusion amount changes annually for inflation.
For 2015, the maximum foreign-earned income exclusion is up to $100,800 per qualifying person. The first condition is that taxpayers are married. Secondly, both spouses (1) work abroad. Third, and (2) meet either the bona fide residence test or the physical presence test. If the requirements are met, each one can choose the foreign-earned income exclusion. Together, they can exclude as much as $201,600 for the 2015 tax year. However, if one spouse uses less than 100% of his or her exclusion, the unused amount cannot be transferred to the other spouse.
Additionally, qualifying individuals may also choose to exclude/deduct from their foreign earned income a foreign housing amount.
The amount of qualified housing expenses eligible for the housing exclusion and housing deduction is limited. Generally, to 30% of the maximum foreign earned earnings exclusion. For 2015, the housing amount limitation is $30,240 for the tax year. However, the limit will vary depending on where the qualifying individual’s foreign tax home is located. It also depends on the number of qualifying days in the tax year. The foreign earned pay exclusion is limited to the actual foreign earned income minus the foreign housing exclusion. Therefore, to exclude a foreign housing amount, the qualifying individual must first figure out the foreign housing exclusion. Then you determine the amount for the foreign earned income exclusion.
Albeit, foreign earned income does not include the following amounts:
- Pay as a military or civilian employee of the U.S. Government or any of its agencies.
- Pay for services conducted in international waters (not a foreign country).
- Pay in specific combat zones, by Presidential Executive Order, that is excludable from income.
- Payments after the end of the tax year following the year in which you performed the services that earned the income.
- The value of meals and lodging excluded from income because the employer furnished it for his/her own convenience.
- Pension or annuity payments, including social security benefits.
A qualifying individual may also claim the foreign earned income exclusion on foreign earned self-employment income.
The excluded amount will reduce his regular income tax. But, it will not reduce his self-employment tax. Also, you may claim the foreign housing deduction – instead of a foreign housing exclusion.
A qualifying individual claiming the foreign earned income exclusion, the housing exclusion, or both, must figure the tax on the remaining non-excluded earnings using the tax rates that would have applied had the individual not claimed the exclusions. In other words, the exclusion is off-the-bottom, not off-the-top.
Once the foreign earned income exclusion is chosen, a foreign tax credit, or deduction for taxes, cannot be claimed on the pay that can be excluded. If a foreign tax credit or tax deduction is claimed for any of the foreign taxes on the excluded income, the foreign earned income exclusion may be considered revoked.
Other issues:
Earned income credit – Once the foreign earned income exclusion is claimed, the earned income credit cannot be claimed for that year.
Timing of election – Qualifying individual must make an initial choice of the foreign earned earnings exclusion. With one of the following income tax returns:
- A return by the due date (including any extensions);
- A return amending a timely-filed return;
- You must file amended returns by the later of 3 years after the filing date of the original return. Or, 2 years after the tax is paid; or
- A return within 1 year from the original due date of the return.
A qualifying individual can revoke an election to claim the foreign earned income exclusion for any year.
You do this by attaching a statement to the tax return revoking one/more previously made choices. The statement must specify which choice(s) you will revoke. As you must revoke the election to exclude foreign earned income and the election to exclude foreign housing amounts separately. If you revoke an election, and within 5 years you wish to again choose the same exclusion, you must apply for approval. You do that by requesting a ruling from the IRS.
Are you looking for foreign employment. Have you already found an opportunity?
Before you make your final decision, please call our office. Learn more about the foreign earned pay and housing allowance exclusions. Also, learn how to meet the bona fide residence or physical presence tests.
