April 14, 2023
If you are a U.S. citizen or resident alien living abroad, it is important to understand the rules for filing income tax returns and paying estimated taxes. Generally, the same rules apply regardless of whether you are in the United States or abroad, and your worldwide income is subject to U.S. income tax, regardless of where you reside. However, U.S. citizens who are residents abroad may also be subject to taxation from the foreign host country, which can lead to double taxation. To reduce this tax burden, qualifying taxpayers may utilize 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 ($112,000 for 2022) attributable to their days present in a foreign country in each tax year. However, if you elect the earned income exclusion, you cannot 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. To qualify for a foreign tax home, you must work in a foreign country and expect to be employed there for an indefinite, rather than temporary, period of time. If your abode remains in the United States (where you keep closer familial, economic, and personal ties), you will not have a foreign tax home unless you work 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 also deduct or separately elect to exclude foreign housing costs from gross income ($15,680 for 2022). To calculate the housing cost exclusion or deduction amount, you must determine your reasonable housing expenses incurred during the tax year in excess of the federal employee base housing amount. This includes 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.
By understanding the foreign earned income and housing exclusion rules, you can better manage your tax burden as a U.S. citizen or resident alien living abroad.
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