U.S. Citizens Abroad

Income Tax Liability While Living Overseas

U.S. citizens and resident aliens are taxed on their worldwide income, regardless of where the income is earned or received. A U.S. citizen who earns in a foreign country may also be taxed by that foreign host country, leading to double taxation. Several provisions in the Tax Code help mitigate this potential inequity, including foreign housing cost exclusion. Below is a summary of the special tax provisions that you may use to offset your income tax liability while working overseas. Next Level Tax is well experienced in these types of returns.

Foreign Earned Income and Housing Exclusion

Reviewing your prior year's tax information, it would be beneficial to meet with us to discuss tax planning regarding your foreign source income. Taxes paid to a foreign country or possession of the United States can be considered either a credit or deduction. It is more beneficial to claim the credit rather than the deduction, in most cases. However, the credit is limited to the amount of the U.S. tax that is in proportion to the foreign source taxable income over worldwide taxable income. Individuals with self-employment income are entitled to deduct certain non-employer-provided housing costs. An Individual's tax home must be in a foreign country to qualify for these exclusions and deductions, meeting either residence or physical presence test. To determine whether a taxpayer qualifies is based on all the facts and circumstances, which includes:

  • You are a lawful permanent resident.
  • the length of stay in a foreign country,
  • the nature and duration of employment,
  • the establishment of a home in the foreign country, and
  • the nature, extent, and reasons for temporary absences from the foreign home.
  • To validate eligibility for the foreign earned income and housing exclusion, a taxpayer should have adequate documentation. The IRS plans to refine compliance on international issues and hopes to increase the use of foreign information documents and data sharing with other federal agencies.

    Taxpayers may not consider both the foreign-earned income and housing exclusions and the foreign tax credit. In case a taxpayer claims the foreign earned income exclusion, the taxpayer will not qualify for the earned income credit for that year. The choice depends on which option more effectively reduces taxes.
    In selecting the appropriate option, a taxpayer should consider factors, such as length and certainty of stay in a foreign country. In case a taxpayer working in a high tax country revokes the election, he may not make the election for five years without IRS's permission and, would have a disadvantage if he were transferred to a low tax country. Also, a "stacking rule" has been added so that U.S. citizens living abroad comply to the same U.S. tax rates as those working in the U.S.

Extension requirements for taxpayers who live outside the U.S. and Puerto Rico differ from those who live inside the U.S.

U.S. citizens and resident aliens are allowed an automatic two-month extension to file their return if they are:

  • Living outside the U.S. and Puerto Rico on the due date of the return, and their principal place of business or assigned post of duty is outside the U.S. and Puerto Rico.
  • In the case of Members of the Armed Forces and on duty outside of the U.S. and Puerto Rico on the tax return's due date.