If you are a U.S. citizen or a U.S. resident alien living in a foreign country, you are subject to the same U.S. income tax laws that apply to citizens and resident aliens living in the United States. One potential benefit for U.S. taxpayers living abroad is the foreign earned income exclusion and housing exclusion or deduction. Qualifying taxpayers may exclude compensation/wages for their personal services and certain foreign housing costs from their gross income.
1. Who qualifies?
U.S. citizens and resident aliens who live and work abroad may be eligible to claim the foreign earned income exclusion when filing their U.S. federal tax return. A resident alien is a U.S. taxpayer who currently holds a green card or held a green card at any time during the calendar year.
2. Amount of exclusion
For 2012, the foreign earned income exclusion is up to $95,100. Qualifying taxpayers may also be eligible to claim an exclusion or deduction from gross income for housing amounts paid or incurred on their behalf.
3. What is considered foreign?
To qualify for the exclusion, a taxpayer’s tax home must be in a foreign country for the period of bona fide residence or physical presence abroad. The IRS explains the term “foreign country” usually is any territory (including the air space and territorial waters under the sovereignty of a government other than that of the United States.
4. How to claim the exclusion?
The foreign earned income exclusion and foreign housing exclusion or deduction is claimed using IRS Form 2555. A shorter Form 2555-EZ is available for certain taxpayers claiming only the foreign income exclusion.
5. Additional information
The IRS provides additional information in Publication 54. Tax Guide for U.S. Citizens and Resident Aliens Abroad. Alternatively, please contact us if you have additional questions.
The information contained herein serves as a guideline and is only provided for general informational purposes. It should not be considered as offering any tax advice. Since tax laws are complex, you should consult your tax advisor on specific issues related to your tax situation.