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> Information provided on this site is for general guidance only and is often simplified. Actual IRS procedures are complex, and taxpayers should obtain professional assistance or use IRS sources for complete information.


Tax Position Of US Citizens Overseas
The concept of 'offshore' is not very useful to a US national from a residence point of view.

Foreign Earned Income Exclusion
The income must be for services performed in a foreign country during a period of foreign residence or presence, whichever applies.

Foreign Housing Exclusion
To claim the housing exclusion, a person must meet the Physical Presence Test or the Bona Fide Resident Test.

The Tax Reconciliation Act 2005
The new law caps the Housing Exclusion at 30% of the foreign earned-income exclusion.

Foreign Tax Credits
Foreign taxes paid by a US taxpayer can often be credited against US tax liability or deducted in figuring taxable income on a US income tax return.



Information provided on this site is for general guidance only and is often simplified. Actual IRS procedures are complex, and taxpayers should obtain professional assistance or use IRS sources for complete information.

Foreign Earned Income Exclusion

If a person's tax home is in a foreign country and they meet either the bona fide residence test or the physical presence test, they can choose to exclude from gross income a limited amount of their foreign earned income. The income must be for services performed in a foreign country during a period of foreign residence or presence, whichever applies.

Prior to the Tax Reconciliation Act of 2005, the amount of foreign wages and salary that could be excluded was limited to the lesser of a person's actual foreign wages or $80,000. For an established foreign resident, the exclusion could be pro-rated based on the amount of time actually spent abroad.

A person who claims the Exclusion cannot claim any credits or deductions that are related to the excluded income, for instance a foreign tax credit or deduction for any foreign income tax paid on the excluded income. The earned income credit is also unavailable. Furthermore, for IRA purposes, the excluded income is not considered compensation and, for figuring deductible contributions in an employer retirement plan, is included in modified adjusted gross income.

The IRS confirmed that: "Effective for tax years beginning after 2005, the amount of foreign earned income (and foreign housing costs) excluded from an individual's gross income will be used for purposes of determining the rate of income and alternative minimum tax (AMT) that applies to his or her nonexcluded income."

"The Tax Increase Prevention and Reconciliation Act of 2005 (P.L. 109-222) adds a new section 911(f) to the Internal Revenue Code. An individual's tax will be the excess of the tax that would be imposed if his or her taxable income were increased by the amount(s) excluded, and the tax that would be imposed if his or her taxable income were equal to the excluded amount(s)."

"For this purpose, the excluded amount(s) will be reduced by the aggregate amount of any deductions or other exclusions otherwise disallowed. In many cases this will have the effect of increasing an individual’s U.S. federal income tax to an amount greater than it would have been under prior law."

Beginning with tax year 2006, therefore, a qualifying individual claiming the foreign earned income exclusion, the housing exclusion, or both, must figure the tax on the remaining non-excluded income using the tax rates that would have applied had the individual not claimed the exclusions.

Generally, a qualifying individual’s initial choice of the foreign earned income exclusion must be made with one of the following income tax returns:

  • A return filed by the due date (including any extensions),
  • A return amending a timely-filed return. Amended returns generally must be filed by the later of 3 years after the filing date of the original return or 2 years after the tax is paid, or
  • A return filed within 1 year from the original due date of the return (determined without regard to any extensions)

For tax year 2006 the maximum amount of the Foreign Earned Income Exclusion under section 911 of the Internal Revenue Code was increased to $82,400.

The foreign earned income exclusion amount is adjusted annually for inflation, starting with the 2006 tax year. For 2009, the maximum foreign earned income exclusion is up to $91,400 (2008: $87,600) per qualifying person. If married and both individuals work abroad and both meet either the bona fide residence test or the physical presence test, each one can choose the foreign earned income exclusion. Together, they can exclude as much as $182,800 (2008: $175,200) for the 2009 tax year.

In addition to the foreign earned income exclusion, qualifying individuals may also choose to exclude or deduct from their foreign earned income a foreign housing amount. Starting with the 2006 tax year, the amount of qualified housing expenses eligible for the housing exclusion and housing deduction was limited.

The limitation on housing expenses is generally 30% of the maximum foreign earned income exclusion. For 2009, the housing amount limitation is $27,420 for the tax year. However, the limit will vary depending upon the location of the qualifying individual’s foreign tax home and the number of qualifying days in the tax year.

The foreign earned income exclusion is limited to the actual foreign earned income minus the foreign housing exclusion. Therefore, to exclude a foreign housing amount, the qualifying individual must first figure the foreign housing exclusion before determining the amount for the foreign earned income exclusion.

BACK TO TOP

Tax Position Of US Citizens Overseas
The concept of 'offshore' is not very useful to a US national from a residence point of view.

Foreign Earned Income Exclusion
The income must be for services performed in a foreign country during a period of foreign residence or presence, whichever applies.

Foreign Housing Exclusion
To claim the housing exclusion, a person must meet the Physical Presence Test or the Bona Fide Resident Test.

The Tax Reconciliation Act 2005
The new law caps the Housing Exclusion at 30% of the foreign earned-income exclusion.

Foreign Tax Credits
Foreign taxes paid by a US taxpayer can often be credited against US tax liability or deducted in figuring taxable income on a US income tax return.

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Offshore-e-com: A topical guide to offshore e-commerce focused on tax and regulation.
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TurboTax - Choose Easy

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