US citizens and resident aliens must pay taxes on worldwide income, including income earned while living abroad. The IRS offers two overseas tax exemptions, including the foreign earned income exclusion and the foreign housing exclusion. To claim these exemptions, taxpayers must complete IRS Form 2555 and meet certain requirements. The foreign earned income exclusion allows taxpayers to exclude a certain amount of foreign income from taxable income, while the foreign housing exclusion is available to taxpayers who pay for the maintenance of a home using earnings provided by an employer.
The US Internal Revenue Service (IRS) requires all US citizens and resident aliens to pay taxes on income earned during the year. Although most citizens and foreigners earn primarily in the United States, those who earn income while living abroad are also responsible for paying worldwide income taxes. The IRS offers two overseas tax exemptions to taxpayers who earn income overseas, including one exclusion that reduces taxable income and another that credits a taxpayer for maintaining a home in another country. To claim one of these overseas tax exemptions, IRS Tax Form 2555 must be completed and attached to Form 1040, along with any other tax documents and supporting 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. Typically, the amount the IRS allows taxpayers to exclude fluctuates each year to reflect inflation. For example, during the 2011 tax year, the IRS allowed taxpayers to exclude the first $91,500 United States Dollars (USD) of earnings and only taxed 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 a income from foreign work. To determine whether a person’s state of residence qualifies for exclusion, they can refer to the instructions on IRS Form 2555.
Taxpayers who qualify for the Overseas Earned Income exclusion generally qualify for the Foreign Housing Exclusion and Deduction, although taxpayers can only claim one of the overseas tax exemptions. Foreign housing exclusion is available to taxpayers who pay for the maintenance of a home using earnings provided by an employer. Self-employed taxpayers can request the Deduction for accommodation abroad. The IRS allows taxpayers to deduct a certain daily or annual amount, which is determined based on the country where 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 he resides in Israel for part of the year, he can deduct up to $139.18 USD per year. day. . Similar to the foreign earned income exclusion, this amount reduces the taxable income a taxpayer must pay to the IRS. If an individual wants to determine the amount of the exclusion or deduction, she can refer to the instructions on IRS Form 2555 and complete Form 2555.
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