The United States taxes citizens and resident aliens on all income earned worldwide, including earned income and investment income. However, you have several ways to avoid U.S. tax on income already taxed by a foreign country. If you’re working in a country with lower taxes than here in the U.S., you may wind up paying less than you would here, even if you earn more abroad than you would for the same work in the States.
Foreign Earned Income Exclusion
You and your spouse can each exclude up to $97,600 of 2013 foreign earned income (salaries, wages, or self-employment) from your U.S. income if:
- Your “tax home” is in a foreign country. (This is your main place of business or employment, even if you maintain a residence in the U.S.);
- You’ve established a bona fide residence abroad for an uninterrupted period including an entire tax year; or you’re physically present in a foreign country for 330 full days during a 12-month period.
Once you elect to claim the exclusion, it remains in effect for future years unless you specifically revoke it.
If you don’t claim the exclusion, or your foreign earned income tops $97,600, you can claim the foreign tax credit for taxes you pay to foreign governments. Alternatively, you can deduct foreign income taxes you pay on Line 8 of Schedule A.
Foreign Housing Exclusion/Deduction
If the foreign income exclusion doesn’t eliminate your U.S. tax on foreign earned income, take advantage of tax breaks for “reasonable” housing costs you pay while working abroad. If you’re employed, you can exclude those amounts from your total income (including the fair market value of employer-provided lodging or any housing allowance). If you’re self-employed, you can deduct housing costs as an adjustment to gross income. Here’s how it works:
- Eligible costs include rent, utilities (other than telephone and pay TV), insurance, furniture rental, parking, repairs, occupancy taxes, and fees for securing a lease.
- The exclusion is generally limited to 30% of the earned income limit ($29,280 for 2013, pro-rated daily) for amounts above a base equal to 16% of the earned income ($15,616 for 2013). The IRS periodically publishes a list of high-cost locations eligible for higher amounts, such as Hong Kong, where the annual limit exceeds $110,000.
- You can’t claim the exclusion for days you received a non-taxable housing allowance as a civilian or military U.S. gov’t employee.
If you have any questions regarding the impact to your foreign tax situation, please do not hesitate to contact us.