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#1 File US Tax Returns Every Year, No Matter Where You Live
At Expatax, our mission is to facilitate tax-related matters for expatriates and retirees, making the otherwise daunting process more comprehensible. One crucial tax facet for US citizens residing abroad is the annual obligation to file tax returns, regardless of their location. No exemption can free US expats from this duty, making this a unique obligation principally catered to US citizens (interestingly, US and Ethiopian citizens are the only ones in the world to be taxed based on their passport, not their country of tax residence).
However, the Foreign Earned Income exclusion offers a significant tax reprieve, ensuring that the majority of expats and retirees are exempted from US government taxes while living abroad. As a caveat, this exclusion only applies to qualifying individuals who meet all requirements and report the income on their tax return. For more specific queries on the subject, you can utilise our TAX AI tool situated at the end of this article.
2# Large Foreign Earned Income Exclusion Before You Pay Any Tax In The US
The limits on the foreign earned income exclusion amount are updated annually in line with inflation. In the 2022 tax year, $112,000 per qualifying individual could be excluded, going up to $120,000 per person in 2023. A couple who both earn abroad and qualify for the exclusion can exclude up to $240,000 together for 2023. Therefore there's quite a bit of headroom before you even consider paying taxes to the US Government while permanently residing abroad.
This exclusion figure must be adjusted pro-rata if the qualification period only includes part of the year, influenced by the number of qualifying days.
#3 Additional Exclusion For Housing Expenses
In addition to the foreign income exclusion, you can also avail yourself of a "foreign housing exclusion". This represents reasonable expenses actually paid or incurred for housing in a foreign country for you and for your spouse and dependents, if they lived with you. These expenses must have been paid for as a benefit from your employer, or from your self-employment earnings.
There is a general cap at 30% of the maximum foreign earned income exclusion, which means that in 2023, this equates to a limit of $36,000. However, this number can fluctuate based on the location of your foreign tax home and the number of qualifying days in the tax year.
Before claiming the foreign earned income exclusion, you must first determine the housing exclusion. This is due to the need to subtract the housing exclusion from your foreign earned income before assessing the income exclusion.
Also: Recognising the Timing of Earnings
Income is generally considered to have been earned in the year in which the work subject to the income was done. This applies even if payment is only received the following year and can affect how much income you can exclude in the earning year.
It is critical to apply the income to the year you earned it when determining your excludable amount for that year, regardless of the payment date. Income received after the following year’s end, relative to the work done, cannot be excluded.
Special Considerations for Self-Employed Individuals
Self-employed individuals must take into account their foreign earned gross receipts, expenses directly related to these receipts, and the deduction for half of the self-employment tax. These aspects are considered when calculating the foreign earned income exclusion, with the exclusion amount being reduced by the pro rata share of the expenses and deduction.
Additionally, individuals in this scenario must remember that deductions cannot be taken against amounts that are excluded from income - in other words you cannot both deduct a dollar of expenses, or foreign tax for that matter, and apply the exclusion to the same dollar.
Conclusion: A Large And Useful Exemption, But Tread Carefully
As evident from this brief overview, there are significant breaks available to the foreign resident US citizen so that, statistically, most expats don't need to worry about paying extra tax money to the US Government after suffering tax in their new expat or retiree homeland - be it Italy, France, or another country. However, the calculations aren't simple - truth be told, they make some of the famously complex Italian tax law look simple -, and there's a burden to file in a timely and accurate manner.
