US citizens and resident aliens must pay tax on worldwide income, including income earned while living abroad. The IRS offers two foreign tax exemptions, including the Foreign Earned Income Exclusion, which allows taxpayers to exclude a certain amount of foreign income from taxable income. Taxpayers who qualify for the Foreign Earned Income Exclusion generally qualify for the Foreign Housing Exclusion and Deduction, although taxpayers can claim only one of the foreign tax exemptions.
The United States Internal Revenue Service (IRS) requires all US citizens and resident aliens to pay tax on income earned during the year. Although most citizens and foreigners earn income primarily within the US, those who earn income while living abroad are also responsible for paying taxes on worldwide income. The IRS offers two foreign tax exemptions to taxpayers who earn income abroad, including an exclusion that reduces taxable income and another that credits a taxpayer for maintaining a home in another country. To claim any of these foreign tax exemptions, IRS Tax Form 2555 must be completed and attached to Form 1040, along with other supporting tax documents and schedules.
One of the foreign tax exemptions, the Foreign Earned Income Exclusion, allows taxpayers to exclude a certain amount of foreign income from taxable income. In general, the amount the IRS allows taxpayers to exclude fluctuates annually to reflect inflation. For example, during the 2011 tax year, the IRS allowed taxpayers to exclude the first $91,500 of earnings and taxed only earnings that exceeded the limit. To claim the Foreign Earned Income Exclusion, a taxpayer must be a U.S. citizen or resident alien who meets a bona fide residency test or physical presence test, must have a home in a foreign country, and must have earned income in the foreign country. foreign. To determine if a person’s state of residence qualifies for the exclusion, you can refer to the instructions for IRS Form 2555.
Taxpayers who qualify for the Foreign Earned Income Exclusion generally qualify for the Foreign Housing Exclusion and Deduction, although taxpayers can claim only one of the foreign tax exemptions. The Foreign Housing Exclusion is available to taxpayers who pay to maintain a home using earnings provided by an employer. Self-employed taxpayers can claim the foreign homestead deduction. The IRS allows taxpayers to deduct a certain amount daily or annually, which is determined according to the country in which the taxpayer resides.
For example, a taxpayer who resides in Israel for the entire tax year can deduct the annual amount, which was $50,800 USD in 2011. If you reside in Israel for part of the year, you can deduct up to $139.18 USD per day. Similar to the Foreign Earned Income Exclusion, this amount reduces the taxable income a taxpayer must pay to the IRS. If a person wants to determine the amount of the exclusion or deduction, they can refer to the IRS Form 2555 instructions and complete Form 2555.
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