Limiting the Tax Bite for Americans Abroad
The tax code says that if you're a U.S. citizen or a resident alien of the United States and you live abroad, you are taxed on your worldwide income. You make it, they tax it – no matter where you make it. But you do get a nice exclusion of up to $105,900 in foreign income (that's the amount for tax year 2019; it usually changes every year).
Plus, if your foreign housing expenses exceed 16 percent of that $105,900 figure, the amount exceeding the 16 percent can be excluded as well. That works out to anything over $16,944 for 2019. The exclusions are prorated for any days not spent overseas. This exclusion is for taxpayers who are employed; a foreign housing deduction is available for self-employed taxpayers living abroad.
How to Qualify
To qualify for the foreign earned income exclusion, the foreign housing exclusion or the foreign housing deduction, your tax home must be in a foreign country and you must be one of the following:
- A bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year (Bona Fide Resident Test).
- A taxpayer outside the U.S. for at least 330 full days during any period of 12 consecutive months (Physical Presence Test).
The Bona Fide Resident Test is not available to nonresident aliens. Also, if you declare to the foreign government that you are not a resident, the test is not satisfied. Eligibility for the exclusion could also be affected by some tax treaties.
Federal workers – such as those in the Foreign Service – and military members are governed by special rules. For details, see IRS Publication 54 – Tax Guide for U.S. Citizens and Resident Aliens Abroad.
To apply for any of these tax breaks, use Form 2555. Our interview will help you fill out the right forms.