Foreign Intrigue on Taxable Income

If you’re a U.S. citizen working abroad, you still must pay U.S. federal income tax, even if a foreign country also taxes you. However, you may be eligible for a unique tax break. A long as certain requirements are met, you can claim the foreign earned income exclusion on a substantial portion of your foreign income—maybe even all of it.

The exclusion is indexed annually for inflation. For 2023, the figure is $120,000, up from $12,000 in 2022.

To qualify for this tax break, you must have foreign earned income, your tax home must be in a foreign country and you must be one of the following.

A U.S. citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year;
A U.S. resident alien who is a citizen or national of a country with which the U.S. has an income tax treaty in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year; or
A U.S. citizen or a U.S. resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.

You may also be entitled to exclude from taxable income the value of meals and lodging provided to you by your employer on their premises and for their convenience. However, such amounts are not treated as foreign earned income.

For these purposes, foreign-earned income includes wages, salaries, professional fees and other amounts paid to you for personal services rendered. It doesn’t apply to amounts received for personal services provided to a corporation that represent a distribution of earnings and profits.

A self-employed individual may claim the foreign earned income exclusion on foreign earned self-employment income. The excluded amount reduces your regular income tax, but not your self-employment tax.

Note that foreign earned income does NOT include the following amounts:

Pay received as a military or civilian employee of the U.S. government or any of its agencies;
Pay for services conducted in international waters or airspace (not a foreign country);
Payments received after the end of the tax year following the year in which the services that earned the income were performed;
Pay otherwise excludible from income, such as the value of meals and lodging furnished for the convenience of your employer on their premises (and, in the case of lodging, as a condition of employment); or
Pension or annuity payments, including Social Security benefits.

You may have a foreign tax home if your work is in a foreign country and you expect to be employed in the foreign country for an indefinite, rather than temporary, period of time. This isn’t the case, however, if your abode remains in the U.S. (where you keep closer familial, economic, and personal ties) unless you work in a presidentially-declared combat zone in support of the U.S. Armed Forces.

Bon voyage: These rules are complex, so don’t hesitate to contact your professional tax advisors for assistance.