Are you a U.S. taxpayer living abroad? If you reside and work in a foreign country, you may be able to exclude some of your income from your U.S. federal income tax return. To qualify, you must meet certain criteria:
- You must have foreign-earned income.
- Your tax home must be in a foreign country.
- You must fall into one of the following categories:
- A U.S. citizen who is a bona fide resident of a foreign country for an uninterrupted period that includes a full tax year.
- A U.S. resident alien who is a citizen or national of a country with which the U.S. has a tax treaty, and who is a bona fide resident of a foreign country for an uninterrupted period that includes a full tax year.
- A U.S. citizen or resident alien who is physically present in a foreign country for at least 330 days during a 12-month period.
To determine if your foreign-earned income is eligible for exclusion, you can use the IRS’s Interactive Tax Assistant tool. If you qualify, you can exclude a certain amount of your foreign earnings from your taxable income, up to the yearly adjusted limit (e.g., $120,000 for 2023).
You may also be able to exclude or deduct certain foreign housing amounts. Additionally, the value of meals and lodging provided by your employer on their premises and for their convenience may be excluded from income.
There are other rules to consider, such as what qualifies as foreign-earned income and self-employment income. Certain types of earnings including government pay and international services do not qualify as foreign earned income. Your tax home, which is where you primarily work, must be in a foreign country.
When calculating your tax, you must use the tax rates that would apply if you hadn’t claimed the exclusion(s) for your remaining income. The Foreign Earned Income Tax Worksheet in the Form 1040 Instructions can help you with this.
Determining tax liabilities can be complicated enough when filing in the U.S., and it is even more so when living abroad. It’s important to consult the relevant IRS publications and seek professional advice for a complete understanding of the rules and requirements related to foreign earned income exclusion, foreign housing exclusion, and foreign housing deduction.
