“Qualifying US citizens and resident aliens who live and work abroad may be able to exclude from their income all or part of their foreign salary or wages, or amounts received as compensation for their personal services.”
www.irs.gov, International Tax Gap Series

Foreign Earned Income Exclusion is a great tax saver! It enables certain taxpayers to avoid or reduce paying taxes to the US. Taxpayers who meet the requirements get to exclude, in 2013, as much as $97,600 of wages and other foreign earned income from taxes. Though this sounds incredible, it is true.

 A US citizen or resident alien, living overseas is taxed by the US on their world-wide income. Such individuals provided they are bona fide residents of a foreign country for an entire year, or are physically present in a foreign country, or countries, for at least 330 full days during any period of twelve consecutive months, may claim the foreign earned income exclusion.

ABC, Inc. offers X, a US citizen, a job with an annual salary of $100,000 in January 2012.  Excited at the prospect of working overseas, X immediately moves to Austria and begins working for ABC, Inc.  X works the entire year in Austria and does not travel to the US.  Since X is a US citizen and has lived over 330 days during a 12-month consecutive period overseas, she is eligible to claim the foreign earned income exclusion.  Out of her 2012 wages, X gets to exclude $95,100.

In order to qualify for the foreign earned income exclusion, a taxpayer must be either a US citizen, or a US resident alien who is a citizen of a country with which the US has an income tax treaty, and must meet either the bona fide residence test or the physical presence test.

A taxpayer, who qualifies for the foreign earned income exclusion, may also qualify for the foreign housing exclusion. This exclusion applies to reasonable expenses paid or incurred for housing in a foreign country provided such payments are made with employer provided amounts.  

US persons, who live and work overseas, should determine if they qualify for the foreign earned income exclusion and the foreign housing exclusion, and should take advantage of these exclusions to reduce their taxable earnings for US tax return filing purposes.  

Disclaimer: Every individual’s tax situation is different and tax situations change over time. This article is intended to give general information to enable the reader to discuss their situation with a tax adviser.  It is not intended to be tax or legal advice and should not be construed as such.

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