If a taxpayer is a U.S. citizen or resident alien, the rules for filing income tax returns and paying estimated taxes are generally the same whether he or she is in the United States or abroad. Your worldwide income is subject to U.S. income tax, regardless of where you reside. U.S. citizens who are a resident abroad are often also subject to taxation from the foreign host country which can lead to double taxation unless a tax treaty applies. Qualifying taxpayers may reduce this tax burden by utilizing the foreign earned income exclusion, the housing cost exclusion or deduction, or the foreign tax credit.
A U.S. citizen living abroad is eligible for the foreign earned income exclusion and the foreign housing costs exclusion or deduction if his or her tax home is in a foreign country and the individual is either:
- a U.S. citizen who meets the requirements of the bona fide residence test by having been a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year; or
- a U.S. citizen who meets the requirements of the physical presence test by being present in a foreign country or countries during at least 330 full days during any period of 12 consecutive months.
Foreign earned income and exclusion. Foreign earned income includes wages, salaries, professional fees and other amounts received as compensation for personal services actually rendered, including the fair market value of any noncash remuneration. U.S. citizens and resident aliens living abroad who have a foreign tax home and satisfy the bona fide residence test or the physical presence test can elect to exclude a portion of earned income ($108,700 for 2021) attributable to their days present in a foreign country in each tax year. An individual that elects the earned income exclusion may not claim a foreign tax credit for the foreign income taxes attributable to the excluded income. The choice between the foreign earned income exclusion and the foreign tax credit depends on which option more effectively reduces taxes.
Foreign tax home. Taxpayers may have a foreign tax home if they work is in a foreign country and expect to be employed in the foreign country for an indefinite, rather than temporary, period of time. Taxpayers do not have a foreign tax home if their abode remains in the United States (where they keep closer familial, economic, and personal ties) unless the taxpayer works in a Presidentially-declared combat zone in support of the Armed Forces of the United States.
Foreign housing exclusion or deduction. In addition to the foreign earned income exclusion, a U.S. citizen or resident alien living abroad may deduct or separately elect to exclude foreign housing costs from gross income ($15,218 for 2021). The calculation of the housing cost exclusion or deduction amount is determined using the reasonable housing expenses incurred during the tax year in excess of the federal employee base housing amount. Housing expenses include rent or the fair rental value of housing provided in kind by the employer, utilities (other than telephone charges), real and personal property insurance, occupancy taxes that may not otherwise be deductible, nonrefundable fees paid for securing a leasehold, rental of furniture and accessories, household repairs, and residential parking.
Please call the Crosslin tax team to discuss your situation and to review the U.S. individual income tax filing obligations for U.S. citizens and resident aliens living or working abroad and the tax benefits including exclusions or deductions that may be available. We are here to help!