Many U.S. citizens live and work outside of the United States. Some have a fixed residency overseas while others frequently travel across the globe. In general, you do have to file and pay taxes on foreign earned income. However, citizens living abroad and overseas travelers would be smart to know the foreign income exclusion rules as well as the physical presence test.
Don’t Pay Taxes on Foreign Earnings
The United States Internal Revenue Service (IRS) says on their “Foreign Earned Income Exclusion” page that as of 2008 US citizens can exclude from their income up to $87,600 if they meet certain requirements. In order to qualify for this exclusion a US citizen must be a resident of a foreign country for a full tax year or be physically present in a foreign country for 330 full days out of 12 consecutive months. A US resident alien may be eligible if he is a citizen of a country that has an income tax treaty with the United States and he is a resident overseas for a full tax year. Other qualifications include having foreign earned income and a tax home in a foreign country.
Use the Physical Presence Test to Avoid Taxes
The Physical Presence Test refers to the qualifying Foreign Earned Income Exclusion rule that says US citizens abroad don’t have to pay if they’ve been abroad for 330 full days within 12 months. These days do not have to be consecutive and they do not have to involve employment purposes. A US citizen could be on vacation overseas and those days would count towards the 330. The 12-month period can begin with any day of any month. However, the 12-months do have to be consecutive.
Defining Foreign Earned Income for Overseas Travelers
Foreign earned income is income received for services done while in a foreign country, while the citizen’s tax home is in a foreign country, and when the citizen is a resident of a foreign country or meets the physical presence test. This can include wages, salaries, and professional fees; but not interests, dividends, or pensions. Certain non-cash income can be counted such as the market value of employer provided lodging.
Tax Home Defined for Americans Abroad
A tax home refers to the general area where the citizen’s place of employment or business is. This does not necessarily refer to a person’s residence or family home. However, if the citizen does not have a regular place of work, her regular living quarters could count. Frequent travelers with no regular place of business of living space are called itinerants. An itinerant’s tax home is wherever he is currently working. The IRS goes into great detail describing the difference between a tax home and an abode.
Don’t Pay Taxes While Traveling
The IRS clearly says that US citizens abroad do not have to pay taxes on all their income if they meet certain qualifications. So, US citizens abroad should become familiar with the Foreign Earned Income Exclusion rule, as should frequent travelers. However, the tax code is tricky. So, before claiming any exclusions or deductions citizen’s should ensure they meet all tax requirements.
Megan Jungwi - Megan Jungwi started her freelance writing career in March 2009. Although new to online writing Megan has long been passionate about the ...
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