How to Eliminate Your US Expat Income Tax
Americans working outside of the US may be able to exclude a large portion of their foreign wages and income from US tax. In order to do so, you must qualify for the Foreign Earned Income Exclusion.
Foreign Earned Income Exclusion
Each year you can exclude an amount adjusted for inflation from your US tax return ($120,000 for 2023), as long as you meet either the bona fide residence test or physical presence test. However, if you’re working as a 1099 employee and reporting income on Schedule C, you’ll still need to pay self-employment taxes.
Physical Presence Test
If you are physically present in a foreign country for 330 days in any 12 month consecutive period, you will qualify under the physical presence test. This test does not require you to be in only one foreign location as long as you are outside of the United States; you can be living in one country and working in another. When calculating your 330 day period, note that days traveling do not count, however you are able to determine which 12 month period you would like to use to meet this test.
Bona Fide Residence Test
You are considered a bona fide resident of a foreign country if you reside in that country for an uninterrupted period that includes the full calendar year. Even if you still own property in the United States or have family here, you may be able to prove you are a bona fide resident of a foreign country as that is where your “tax home” is and where you intend to continue returning to work with no known end date.
Foreign Housing Exclusion
In addition to the foreign earned income exclusion, you may also be eligible to exclude amounts paid by your employer for certain housing expenses, whether they are paid directly to you or on your behalf. Expenses that qualify for the foreign housing exclusion include items such as rent (including rented furniture), repairs, insurance, security deposits, and utilities other than telephone.
Expenses that are considered lavish or those that could be deducted on a US tax return do not qualify, including deductible mortgage interest, property taxes, costs associated with buying property, domestic labor, improvements, purchased furniture and cable television.
The foreign earned income exclusion and foreign housing exclusion can be combined; you don’t need to choose between the two!
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