As the IRS explains, if you are a U.S. citizen or resident alien, the rules for filing income, estate, and gift tax returns and paying estimated taxes are generally the same whether you are in the United States or abroad. Your worldwide income is subject to U.S. income tax, regardless of where you reside.
The only real break is an automatic two-month extension to file your return without requesting it. For a calendar year return, the automatic two-month extension is to June 15. But that’s just for filing, not for payment. You must pay any tax due by April 15 or the IRS will start charging interest.
However, that isn’t the end of the story. Americans living overseas may be entitled to one or more of the following: the foreign earned income exclusion, the foreign housing exclusion and the foreign housing deduction. To claim these benefits, you must have foreign earned income, your tax home must be in a foreign country and you must be one of the following.
- A U.S. citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year.
- A U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year.
- A U.S. citizen or a U.S. resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.
If you meet these criteria, you may qualify to exclude your foreign earnings from income up to an amount that is adjusted annually for inflation ($107,600 for 2020). In addition, you can exclude or deduct certain foreign housing amounts.
You also may be entitled to exclude from income the value of meals and lodging provided to you by your employer on their premises and for their convenience. However, such amounts are not considered foreign earned income.
Of course, as with so many tax rules, the definitions are important. “Foreign-earned income” means wages, salaries, professional fees or other amounts paid to you for personal services rendered by you. It does not include amounts received for personal services provided to a corporation that represent a distribution of earnings and profits rather than reasonable compensation.
Pay received as a military or civilian employee of the U.S. government or any of its agencies is not considered foreign earned income, nor are pension or annuity payments, including Social Security benefits.
There are many other provisions and exceptions. To be sure you’re following the rules but not leaving any money on the table, consult an MCB Advisor at 703-218-3600 or click here. To review our tax news articles, click here. To learn more about MCB’s tax practice and our tax experts, click here.