With the world as small as it is today, it is much easier to pick up and move to other countries for work. Although living and working in other countries, most US citizens remain US citizens during their time abroad. How is this foreign income treated tax-wise?
All US citizens are taxed on their worldwide income. However, provided you qualify, there is a huge beneficial exemption, called the Foreign Earned Income Exclusion. This rule allows taxpayers to exclude up to $104,100 from you taxable income in 2018. To take this exclusion, a few qualifications must be met:
- To use the foreign earned income exclusion, you must have foreign earned income. Foreign earned income only includes the following: salaries and wages, commissions, bonuses, professional fees, and tips.
- You must have a taxable home in the foreign country.
- You must meet one of the following three resident tests:
- You are a US citizen, and a bona fide resident of a foreign country for an entire tax year of uninterrupted time.
- You are a US resident alien, but a citizen of a country with which the US has an income tax treaty in effect, and a bona fide resident of a foreign country for an entire tax year of uninterrupted time.
- You are a US citizen or resident alien, and you are physically present in a foreign country for at least 330 in a consecutive 12 month period.
To summarize the above, in order to qualify for the foreign earned income exclusion, you must have income earned in a foreign country, you must have a taxable home in said foreign country, and you must be a bona fide resident, or meet the physical presence rules.
If you meet these three requirements, congratulations! You just won yourself a major exemption.
