Expat Tax Benefits

IRS Foreign Earned Income ExclusionSeeing as how today is April 15th (the day taxes are due in the United States), I thought it would be fitting to finally finish the post I had been working on regarding some of the tax benefits to being an expat.

When I decided to move to Buenos Aires last year, I wasn’t aware that there could also be some pretty interesting tax savings involved in living out of the country.  As a U.S. citizen living out of the country you are still taxed on your worldwide income and must still file a tax return. In fact, it is against the law to give up your U.S. citizenship in order to avoid U.S. taxes.  However, you may be able to exclude the first $87,600 of your income from taxes as well as exclude or deduct certain foreign housing payments.

According to the IRS Publication 54 which covers this, to claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, you must meet all three of the following requirements.

  1. Your tax home must be in a foreign country.
  2. You must have foreign earned income.
  3. You must be either:
    1. A U.S. citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year,
    2. A U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year, or
    3. A U.S. citizen or a U.S. resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.

Clearly, one of the biggest benefits for U.S. expats is the ability to exclude up to $87,600 in foreign earned income.  According to the IRS, foreign earned income generally is income you receive for services you perform during a period in which you meet both of the following requirements:

  • Your tax home is in a foreign country.
  • You meet either the bona fide residence test or the physical presence test.

The source of your earned income is the place where you perform the services for which you received the income. Foreign earned income is income you receive for working in a foreign country. Where or how you are paid has no effect on the source of the income. For example, income you receive for work done in Argentina is income from a foreign source even if the income is paid directly to your bank account in the United States and your employer is located in New York City.

The IRS covers this in a lot of detail in Publication 54 and, of course, you should consult with an accountant as well.

For some additional reference, Don Nelson an attorney and CPA has a good post on this titled “US Taxation Of Americans Living Abroad.”His post also covers the need for self-employed Americans to file a Schedule C and pay the self-employment tax of 15.3% which is not reduced by the foreign earned income exclusion.  The Career By Choice blog also has an excellent two-part article on this:  Expat Tax: Foreign Earned Income Exclusion Explained – Part 1 and Expat Tax: Bona Fide Residency Test for FEIE – Part 2.

Hopefully this will work out for you as well!