More and more US citizens are moving abroad for various reasons. The move could be work-related, family-related, or simply adventure-related. Technology has also made it possible for many professionals to be able to work from anywhere in the world. Most US citizens aren’t aware of the tax breaks they may be able to get as a result of moving out of the US.
US citizens and residents (i.e. green card holders) are taxed on their worldwide income. If a US citizen moves to Thailand and has wages from Thailand sources, this income must be reported on their US tax return. So, where’s the tax break? IRS code section 911 allows for a Foreign Earned Income Exclusion of $107,600 in 2020. For example, if wages earned during 2020 were $170,000, the exclusion allowed is $107,600 for taxable wages of $62,400. There’s the break.
In addition to the Foreign Earned Income Exclusion, an additional exclusion or deduction can also be taken for Foreign Housing expenses paid. The amount allowed for the exclusion or deduction is the amount of housing expenses less a base amount determined by the country of residence. Housing expenses include rent, repairs, utilities, parking, and real and personal property insurance. These expenses cannot be lavish or extravagant under the circumstances. The cost of purchasing a property is also not included in the definition of housing expenses. The limit on housing expenses is limited, depending on the country of residence. Also, keep in mind that for self-employed individuals, the housing deduction must be used and not the exclusion.
Continuing with our example above, if the taxpayer spent $100,000 in housing expenses in Thailand, an additional $59,000 would be excluded from gross income (calculation based on limits found on Form 2555 and Publication 54). Assuming there was no other income for wages earned of $170,000, $166,600 is excluded for total gross income of $3,400.
In order to qualify for the Foreign Earned Income Exclusion, one of two tests must be met. The tests are Bona Fide Residence Test and Physical Presence Test:
- To meet the Bona Fide Residence Test, the taxpayer has to either be a US citizen who is:
a. A bona fide resident of a foreign country that includes the entire calendar year, or;
b. A US resident alien who is a citizen or national of a country with which the US has an income tax treaty for the entire calendar year.
Meeting this requirement depends on the intention of the taxpayer. The intent must be to stay in the foreign country for an indefinite period of time.
- To meet the Physical Presence Test, the US citizen or resident must be physically present in a foreign country for at least 330 days during a 12-month period.
The Foreign Earned Income Exclusion and the Housing Exclusion/Deduction are reported and calculated on Form 2555.
There are additional things self-employment individuals must keep in mind. Self-employed taxpayers may still have to pay self-employment tax on the earnings, even if it was not earned in the US. However, if the US has a totalization agreement with the foreign country, this may not be the case.
The Foreign Earned Income Exclusion is a complex area of US taxation. If you are in a situation where you may be able to use the Foreign Earned Income Exclusion, contacting a professional is advisable.
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About the Author
Evelyn Fernandez, CPA, MST, Principal
Tax, International Tax, Manufacturing & Distribution
Evelyn is a Tax Principal at KROST. She has been in the public accounting profession for over 15 years. Her areas of expertise include tax planning and compliance for high net worth individuals, international entities and individuals, multi-state taxation, partnerships, S corporations, trusts, nonprofit organizations, and entertainment businesses. » Full Bio