US citizens must pay taxes on their income worldwide, but can claim a foreign income exclusion of up to $80,000 per year if they are bona fide residents of a foreign country or physically present there while working. The exclusion can be claimed using Form 2555 or 2555-EZ. Where the income is paid from does not affect whether it is considered foreign income. A tax burden example is given.
First, it’s important to note that if your tax situation is particularly complex, it’s always a good idea to speak with a certified public accountant, to make sure you’re taking full advantage of the tax law. Obtaining foreign income as a United States citizen is a somewhat complicated procedure, and claiming the exemption can be a bit tricky. However, in some situations it can be straightforward and you may be able to easily figure your exemption on your own.
All citizens of the United States must pay taxes on their income, no matter where in the world they live or work. However, to accommodate citizens who may be paying taxes abroad, the United States has put in place a very useful procedure to help pay too much tax: the foreign income exclusion.
The foreign earned income exclusion can be up to $80,000 United States dollars (USD), which a United States citizen can exclude each year from their federal income taxes. To be eligible for this exclusion, the citizen must be able to show that he is a bona fide resident of a foreign country or was physically present there. Of course, they must also be working in the foreign country. The exclusion can be claimed using Form 2555 or, in some cases, the shorter Form 2555-EZ.
To be able to claim a foreign income exemption, you only need to be working in a foreign country. Where you are paid and where you are paid from does not influence whether or not you have foreign income. If you reside in the United States, but are paid by a German company into a German bank account, it is still considered domestic income and is taxed normally. Conversely, if you work in the United States, but the employer you work for is a US company, and your income is connected to your US bank account, you are still eligible for a foreign income exemption.
The calculation showing your total tax burden is best demonstrated by an example: Let’s say you are working for a large international company as a hotel consultant. He works five days a week, with vacation time and sick leave, giving him 220 total days of work each year. You receive a salary of $55,000 USD each year, and on top of that you received a small living stipend of $10,000 USD to cover your rent. Although most of the time he works was abroad, he occasionally returned to the United States to work in the home office, for a total of 18 days. So, to calculate your tax burden in the United States, you would take the number of days worked there (18), divide it by the total number of days worked (220), and multiply it by your total income plus stipends ($65,000 USD), resulting in a tax burden of $5,400 USD on which you will have to pay tax.
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