Sunday, September 26 , 2021

How much income can Americans living overseas exclude from U.S. tax?

When tax time rolls around, what kind of taxpayer are you? Do you:

  1. Fill out your forms as soon as you have all of your neatly organized documents together and the proper paperwork ready? Whether you owe or receive a refund, it doesn’t matter as long as the task is done.
  2. Procrastinate until the absolute last minute? You’re not going to give the government any money until you have to and even then, you’ll do everything in your power not to pay a dime more in taxes than necessary.
  3. Have someone else do your taxes for you? You don’t have the time for that kind of frustration, plus you would rather make sure you take advantage of all tax breaks possible.

When you are an American citizen living abroad, there are many ways in which you have to adapt. One of them is filing U.S. taxes differently. If you are a newly emigrated American, it is strongly suggested that you skip doing your taxes yourself and have a professional who specializes in expat taxes help out.

That’s because as an American citizen and taxpayer, you continue to have a financial connection to the U.S., because all U.S. citizens are taxed on their worldwide income. 

However, instead of being double taxed – once by the country you are currently living in and another by the U.S. – Americans living abroad can claim the Foreign Earned Income Exclusion, an IRS provision that allows expats like yourself to exclude their foreign earnings from income up to an amount that is adjusted annually for inflation.

For 2020 tax year, that number clocks in at $107,600. Claiming the Foreign Earned Income Exclusion will automatically eliminate your tax liability to the U.S. on this  much earned income.

The Internal Revenue Service (IRS) defines foreign earned income as wages, salaries, professional fees and other compensation you received for services you provided. It does not; however, include funds received for personal services provided to a corporation that represents a distribution of earnings and profits instead of direct compensation. 

Self-employed American expats can also claim the Foreign Earned Income Exclusion on their income earned from abroad. The excluded amount will reduce their regular income tax burden but will not reduce U..S. self-employment tax.  

These income sources, according to the IRS, are not considered foreign earned income:

  • 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 that can already be excluded, such as meals and lodging provided by your employer on their premises and as a condition of employment
  • Pension or annuity payments, including social security benefits

To claim the Foreign Earned Income Exclusion, you need to use Form 2555. If you have specific questions, consult an expat tax professional for guidance.

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