Individuals who work and live abroad, but who are US citizens or green card holders, are often confused by their tax obligations. One of the most frequently stated concerns from potential clients is their desire to avoid double taxation to the fullest extent possible. Double taxation of US taxpayers who live abroad can occur due to the rather unique manner in which US citizens and green card holders are taxed. That is, they have a tax obligation to the United States for their worldwide income regardless of the jurisdiction in which the income was actually earned. Furthermore, clients are also often interested in whether they may exclude the expenses that the individual incurred or that were paid by the employer while the individual was abroad.
At US Tax Help our tax professionals are dedicated to answering tax questions like these. This blog post will discuss the general rules applicable to exclusions, however all tax advice is client-specific and readers should seek professional tax advice before taking any action.
Understanding the foreign income and foreign residence tax exclusions
Prior to claiming an exclusion it is essential to ensure that the tax payer is a qualifying individual. Qualifying individuals who earned income abroad can file for exclusions including a foreign housing expenses exclusion, a foreign earned income exclusion, and an exclusion for lodging and meals provided by an employer.
At the most general level, the foreign earned income exclusions are governed by a yearly limit that is adjusted yearly to account for inflation. For the 2014 tax year, the maximum exclusion amount was set at $99,200 – an increase over the previous limit for 2013 of $97,600.
To determine the amount of exclusion that you may qualify for in any particular year one can apply a mathematical formula. The formula is to multiply the yearly limit by a fraction. The numerator of the fraction is calculated by tallying the number of days you were considered a qualified individual for purposes of the exclusion. The denominator of the fraction is always the number of days in the tax year.
Thus, if you were a qualified individual (see below for discussion of this status) for 330 days in 2014 and you earned $200,000 during that year while flying abroad, you would be able to exclude $89,678 ($99,200 × 330/365) against the $200,000 that you earned (approximately $271.75 for each day you were a qualified individual).
The housing cost amount exclusion is available only if the expenses for housing can be traced back to the employer-provided amounts. If you are unable to link these expenses to the employer-provided fund, you may still be able to deduct the expenses however an additional limitation will apply. The housing cost exclusion is equal to housing expenses to the extent that they exceed 16% of the maximum foreign earned income amount, but they may not exceed 30% of the foreign earned income amount.
Using the 2010 numbers, housing costs are excludable to the extent that they exceed $14,640 ($91,500 x 16%). On a daily basis, the amount is $40.11 ($14,640/365). Expenses are not excludable to the extent that they exceed $27,450 ($91,500 x 30%). On a daily basis, that is $75.21 ($27,450/365). So the maximum daily exclusion for 2010 is $35.10 ($75.21 – $40.11). Items in the category of housing expenses include:
- Occupancy taxes
- Nonrefundable fees paid for securing a lease
- Real property
- Personal property
- Furniture rental
- Parking fees for the residence
A separate exclusion is provided for employer-provided meals and lodging if certain requirements are met. The requirements for the value of meals to be excludable include:
- The meal is provided at the employer’s place of business.
- The meal is provided for the employer’s
Additionally, an exclusion for the value of employer-provided lodging may be taken if the lodging meets a similar set of requirements:
- The lodging must be located on your employer’s business premises.
- The lodging provided for the employer’s convenience
- The employee must accept the lodging as a condition of employment.
There is no set limit on the exclusion for employer-provided meals and lodging, however those electing to utilize this exclusion should ensure that the particular item meets the requirements and that the individual themselves is a qualified individual.
What qualifications do I need to qualify for an exclusion?
To qualify for the foregoing exclusions, the individual must have a tax home in a foreign country. Your tax home is defined as your regular or principle place of business, though a home can also be considered a tax home in certain instances. In addition to having a tax home, the individual must also satisfy one of the following:
- The individual is a U.S. citizen but is considered to be a bona fide resident of a foreign country. A bona fide resident is on present in a foreign country for an uninterrupted period of the entire taxable year.
- The individual is a U.S. citizen or resident who can satisfy the physical presence test. The test is satisfied when a US citizen or resident is present in at least one foreign country for 330 full days during any period of 12 consecutive months.
If you believe that you may qualify for the foreign income exclusion, you must make an election for them when you file. The election you must make is contained on either Form 2555 or Form 2555-EZ. An exclusion for employer-provided meals and lodging may be made sans an election. Also essential to note is if you choose to make an election, unless revoked, it will apply to all subsequent taxable years.
Rely on our tax exclusion experience
At US Tax Help, CPA Ted Kleinman can help hard-working US taxpayers who are living oversea minimize the amount of double taxation that is owed. Ted Kleinman is experienced handling foreign tax issues including FBAR, reporting requirements, and other aspects of tax compliance. To schedule a consultation regarding your tax issues with an experienced CPA, call (541) 923-0903 or contact us online.