Tax Tips for U.S. Citizens Living Abroad: Foreign Earned Income Exclusion

June 13, 2013 | Tax Laws

Tax Tips for U.S. Citizens Living Abroad: Foreign Earned Income Exclusion

Some American citizens choose to live and work outside of the United States.  On the federal level, all US  taxpayers and resident aliens must report and pay taxes on their worldwide income, regardless if they live within or outside of the US.

Taxpayers who reside overseas are given an automatic two month extension to file their returns, and this year the filing date is June 17, 2013.  However, any tax due must be paid by the standard April 15th deadline, or there will be interest and the possibility of penalties.  It is important to understand that payments are not considered received by the postmarked date, but the date of the actual receipt by the IRS.

There is information that taxpayers with foreign income should know:

  • When reporting worldwide income, be sure to include income from foreign trusts, foreign bank accounts, and foreign securities accounts.
  • File the required tax forms, especially Schedule B Interest and Ordinary Dividends, with the tax returns.  Many taxpayers who live abroad need to file Form 8938, Statement of Specified Foreign Financial Assets or Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts with the IRS.
  • There may be a credit or deduction for income taxes paid to a foreign country.  This can help reduce taxes in the situation where the US and another country both tax the same income.
  • There is the Foreign Earned Income Exclusion.  Many taxpayers who live and work abroad may qualify for their foreign earned income exclusion.  Those who do qualify do not pay taxes on their foreign earned income up to $95,100 for 2012.

The Foreign Earned Income Exclusion is a voluntary benefit for taxpayers abroad.  By Filing Form 2555, Foreign Earned Income, they can collect on wages tax-free.  In order to qualify for this exclusion the individual must be:

  • A US citizen that is a resident of one or more than one foreign country for an entire tax year uninterrupted
  • A US resident alien who is a citizen of a country with which the US has an income tax treaty in effect, and the individual is a resident of a foreign country for an uninterrupted period including a tax year.
  • A US citizen who in 12 consecutive months lives in one or more foreign countries for a minimum of 330 complete days.

The Foreign Earned Income Exclusion can be complicated. Often individuals think they qualify, but the Tax Court or the IRS does not agree.  What the Tax Court often finds is that though the US citizen lived and worked abroad, the US is where their tax home is.  A tax home is considered the main place where an individual lives and works and is considered to be the permanent residence of the taxpayer.   If a taxpayer is found to have strong ties to their tax home within the US and limited ties abroad, the court will rule against the exclusion.

The rules for the Foreign Earned Income Exclusion are technical.  If US taxpayers are interested in claiming this exclusion, they should consult with us since we understand the international tax rules.



Attorney Timothy Hart

Timothy S Hart, the founding partner of the tax law firm of Timothy S. Hart Law Group, P.C. is both a New York Tax Lawyer & Certified Public Accountant. His area of expertise includes innovative solutions to solve your Internal Revenue Service and New York State tax problems, including tax settlements through the Federal and New York State offer in compromise programs, filing unfiled tax returns, voluntary disclosures, tax audits, and criminal investigations. [ Attorney Bio ]