Working Abroad – Paying the U.S. Income Tax

Expatriates and the federal income tax

Going abroad to live and work is a very exciting thing to do.  It also has tax consequences because the United States will tax your income, no matter where you live and no matter where or how you earn it.  But there are significant credits, deductions, and exclusions available to the expatriate.  To make your time abroad the exciting adventure it deserves to be, you need to understand your tax rights and obligations.

Most countries don’t tax their citizens for money earned outside the homeland.  Because of this, when their citizens go abroad to work they have an economic advantage over U.S. workers:  In real dollars, they’re a lower cost option for foreign employers.  So to even the playing field a bit the Internal Revenue Code provides U.S. expats with great options to even the playing field.

First, a qualifying U.S. citizen or resident alien working abroad gets to exclude from U.S. taxation their first $97,600 (as of 2013) of earned income.  Sweet, sure, but to qualify the citizen or resident alien must have a tax home in a foreign country and be able to pass either the “physical presence test” or be a “bona fide resident” of the foreign country.

The physical presence test requires that you spent at least 330 full days of any 12 consecutive months in the foreign country.  The days themselves don’t have to be consecutive so you can leave every now and again.  But if you return to the United States for any reason, including illness, family problems, or because your employer ordered you to return, then the days you stay don’t count toward your 330.  There’s a bit of leeway here:  If you had to leave because of civil war or “similar adverse conditions” (and because of that you failed to amass your required 330 days) then maybe the requirement can be waived, provided the other elements of physical presence and tax home were satisfied.[1]

To be a bona fide resident of a foreign country, on the other hand, a U.S. citizen must have been resident in the foreign country for an uninterrupted period that includes an entire tax year.  If you’re a U.S resident alien, though, your home country must also have an income tax treaty with the United States.

Merely living in the foreign country is not enough, by itself, to render you a bona fide resident of it.  In fact, apart from the entire tax year requirement, the bona fide residence test is mostly a subjective one.  The IRS will ask (via form 2555) things like whether you owned or rented your foreign home, whether your family been living with you, whether you were required to pay income tax to the foreign country.  Perhaps most importantly, the IRS will want to know whether you at some point told the foreign authority that you were not a bona fide resident there (this could happen when you try to avoid some local, onerous duty or fee).

The second big income exclusion allowed a qualifying expatriate worker is a portion of overseas housing costs.[2]  The excluded amount varies by country, and the IRS posts the maximums allowed on its website.  But don’t get too excited just yet.  There are lots of little rules and computational quirks here.  And, no matter what, you can’t offset more income than you earned in the foreign country.

Living abroad can be wonderful but there’s no doubt it adds tax complexity to your life, which is why you’ll want to make sure you’ve solicited good tax advice before going and after you’re there.


[1] Counting days can be tricky because days spent travelling may or may not be counted, depending on the route taken and time spent.

[2] In the U.S., absent special circumstances, an employer’s payments toward your living costs are deemed taxable income to you.

This article is for informational purposes only and does not constitute legal advice.  You should consult a qualified attorney before taking any action.