How to Exclude Income Under The Foreign Income Exclusion

US international tax laws do allow you to exclude foreign earned income, under specific conditions. If you elect to use the foreign earned income exclusion, you may be able to exclude up to a set maximum amount of foreign income from your income tax. However, in order to do this, you must actually file a tax return and include the amount to be excluded on your return for reporting purposes.

What is the Income Limit under the Foreign Earned Income Exclusion?

The amount that you can exclude from your income under the foreign earned income exclusion changes each year. For 2013, you can exclude up to $97,600 under the foreign earned income exclusion. (Eric Toder, Tax Policy Center, Taxes on Foreign Earned Income (July 22, 2013), available at http://www.urban.org/UploadedPDF/1001689-TN-taxes-on-foreign-earned-income.pdf). If you and your spouse both qualify for the exclusion under the bona fide residence test or the physical presence test, then you can both exclude this amount on your individual tax returns. If you are married filing jointly, then the total excludable amount for 2013 is $195,200.

The amount you can exclude under the foreign earned income exclusion can also be reduced by amounts you have excluded under the foreign living expenses deduction or exclusion.

Can I Exclude Foreign Living Expenses from my Income Tax?

Yes, in some cases you will be able to exclude or deduct foreign living expenses from your income tax. The housing exclusion applies to amounts you pay for housing, when the funds used to pay for the housing come from employer-provided amounts. This includes amounts paid to you by your employer which constitute taxable foreign income for the year. In contrast, the housing deduction applies only to housing expenses paid out of self-employment earnings.

What is the Housing Amount for the Purposes of the Exclusion or Deduction?

For the purposes of determining the housing exclusion or deduction, foreign housing must be reasonable expenses incurred for housing in a foreign country. You cannot claim housing expenses that are unreasonably extravagant or lavish for the circumstances. You also cannot deduct or exclude amounts incurred for purchasing furniture or accessories, or improving the value of the property.

What is the Limit on the Foreign Housing Exclusion or Deduction?

As with the foreign earned income exclusion or deduction, there is also a limit to the amount you can exclude or deduct for your foreign living expenses. The calculation of the foreign housing exclusion or deduction is connected to the amount of foreign earned income that you have. Specifically, the limit on foreign housing exclusion or deduction is equal to 30% of the maximum amount you can exclude or deduct under the foreign earned income exclusion or deduction. (Internal Revenue Service, Figuring the Foreign Earned Income Exclusion, http://www.irs.gov/Individuals/International-Taxpayers/Figuring-the-Foreign-Earned-Income-Exclusion). Your foreign housing expenses cannot exceed your foreign earned income minus the total of the foreign earned income exclusion plus the housing exclusion. (Internal Revenue Service, Foreign Housing Exclusion or Deduction, http://www.irs.gov/Individuals/International-Taxpayers/Foreign-Housing-Exclusion-or-Deduction).

Forms Used in the Foreign Earned Income Exclusion

In order to use the Foreign Earned Income Exclusion and the foreign housing exclusion or deduction, you must complete IRS Form 2555. IRS Form 2555, http://www.irs.gov/pub/irs-pdf/f2555.pdf.

How a Tax Attorney Can Help

If you are a U.S. Citizen with foreign income or living abroad, you may have many questions or be in need of international tax services. A knowledgeable tax attorney can help you evaluate all aspects of your situation.

The Tax Lawyer - William D. Hartsock has been successfully helping clients comply with U.S. International Tax Laws and deal with issues related to worldwide taxation since the early 1980s. Mr. Hartsock offers free consultations with the full benefit and protections of attorney client privilege to help people clearly understand their situation and options based on the circumstances of their case. To schedule your free consultation simply fill out the contact form found on this page, or call (858) 481-4844.