Do You Have to Pay US Taxes on Foreign Income?
In the United States, taxes are levied based on the taxpayer’s citizenship, not the geographical location of the taxpayer. Income that United States citizens make in other countries—whether it’s earned income, unearned income, variable income, or noncash income—must be taxed per the United States tax code. If you are a United States expat living abroad who would like to learn more about whether your income earned abroad will be taxed on how you use the services of foreign tax accountant U.S. Tax Help, continue reading.
Types of Foreign-Earned Income
Taxpayers living outside of the United States will have to pay taxes on their foreign-earned income. Foreign-earned income is income earned in a foreign country during a period in which you meet the bona fide residence test (residing in a country for the entirety of a tax year) or the physical presence test (residing in a foreign country for a full 330 days within one 12-month period). Foreign income is grouped into one of three categories: earned income, variable income, and noncash income.
Earned income in another country is earned by providing services. Earned income includes salaries, wages, commissions, bonuses, professional fees, and tips.
Variable income is income that, depending on certain factors, may be considered earned income, unearned income, or both. It includes business profits, royalties, rents, fellowships, and scholarships.
If your employer provided property or facilities to you while living abroad, it is considered noncash income. The amounts paid to you as allowances or reimbursements for the cost of living, education, moving, and other costs associated with living and working in another country will be considered earned income.
Income That Isn’t Considered Foreign-Earned
Unearned income includes dividends, pensions, alimony, interest, capital gains, gambling winnings, social security benefits, and annuities. The following cannot be included in foreign-earned income: some reimbursements, payment received as an employee of the U.S. government, amounts included in your income due to your employer’s contributions to a nonqualified annuity contract or nonexempt employee trust, and payments that are received after the end of the year following the tax year during which you performed services that earned the income.
The Foreign-Earned Income Exclusion
While nearly all American expats must file tax returns with the IRS, they may offset costs by qualifying for the Foreign-Earned Income Exclusion
Qualifying for The Foreign-Earned Income Exclusion
To qualify for exclusions and deductions, United States expats must pass either the bona fide resident test or the physical presence test. To pass the bona fide resident test, the taxpayer must have been a resident of a foreign country for an uninterrupted period that included one entire tax year. To pass the physical presence test, the taxpayer must have been physically present in a foreign country (or multiple countries) for at least 330 full days during one 12-month period.
The Foreign-Earned Income Exclusion
If you qualify for the Foreign-Earned Income Exemption, you may be exempt from filing tax returns on your foreign-earned income. To qualify, you will need to pass either the physical presence test or the bona fide residence test. Qualifying for the Foreign-Earned Income exclusion means that you’ll be able to exclude your income from being taxed, up to a specific limit. For the 2019 tax year, the limit of income that can be excluded is $105,900. Only the difference between $105,900 and the income that exceeds it will be taxed.
The Streamlined Foreign Offshore Procedures
Taxpayers who don’t qualify for the Foreign-Earned Income Exemption will have to file federal tax returns as they would regularly. The Streamlined Foreign Offshore Procedures, a tax amnesty program, can be used by expats who have filed late.
Other Exclusions and Deductions That Expats May Qualify For
The following are exclusions and deductions included in the United States tax code that apply to citizens who live abroad.
The Foreign Housing Exclusion
The Foreign Housing Exclusion applies to costs that are paid for using employer-provided amounts. This includes any amount that was paid to you by your employer that is taxable foreign earned income for the given tax year. The foreign housing exclusion is the amount that is equal to the total of your yearly foreign housing expenses minus the base housing amount. Housing expenses include reasonable expenses that are incurred for you and your spouse and dependents if they lived with you. Housing expenses do not cover lavish expenses, the cost of any property you purchased, furniture or accessories, and improvements to the home. The foreign housing exclusion also does not include the cost of meals or employer-provided lodging.
Taxpayers should note that if they choose this exclusion, they cannot claim less than the full housing exclusion amount to which they are entitled. Taxpayers who choose to use the foreign earned income cannot take foreign tax credits or deductions on taxes on income they can exclude. If taxpayers take credits or deductions for any of these taxes, their choice to exclude housing amounts may be revoked.
The Foreign Housing Deduction
The Foreign Housing Deduction works in the same way that the Foreign Housing Exclusion does, except it applies to self-employed earnings.
International Tax Experts Serving US Citizens Living Overseas
United States taxpayers that live in other countries should allow the foreign international tax accountants from U.S. Tax Help to assist them with their taxes on foreign-earned income. They can put their experience and knowledge to use to help taxpayers claim deductions, exclusions, and credits and avoid penalties. To learn more about how U.S. Tax Help can help you, call (541) 362-9127 today.