You just received notification that your company is sending you to work in Bali. Not only are you going to reap the rewards of a sunny locale but Uncle Sam may benefit also.
The worldwide income of any U.S. citizen or resident alien is subject to US tax. It doesn’t matter where you live and work, or if the income comes to you in the form of wages, self-employment, investments, pensions, rents or royalties. The Internal Revenue Service requires its fair share.
There is a bit of a break for U.S. taxpayers who live abroad and meet certain requirements.
Foreign Earned Income Exclusion
First, the good news. The maximum amount of wages and self employment income an eligible worker can exclude from U.S. taxation on a 2013 return is $97,600. Now, for the bad news. An elibible overseas worker with earned income can subtract the exclusion amount, but will need to pay taxes on the amount over $97,600. This amount is taxed as if it were still in the bracket it would have been in before the exclusion was allowed. This means that US workers will lose the benefit of the lower tax brackets.
Foreign Housing Expenses
Housing expenses include reasonable expenses paid or incurred in the taxable year for housing in a foreign country for you, your spouse and your dependents.
Eligible housing expenses include rent, the fair rental value of housing provided in kind by your employer, utilities (other than telephone charges), real and personal property insurance, rental of furniture and accessories, repairs, and residential parking.
Reasonable housing expenses do not include expenses that are lavish or extravagant under the circumstances, deductible interest or taxes, the cost of buying property, principle payments on a mortgage, the cost of domestic labor (maids, gardeners, etc.), purchased furniture or accessories, or improvements. You also cannot include in housing expenses the value of meals or lodging that you exclude from gross income.
The amount of foreign housing exclusion available is 16% of the annual foreign earned income exclusion amount or $15,616 for 2013.
Eligibility requirements for the exclusion and housing deductions
In order to exclude any overseas earnings from U.S. taxation, you must meet one of the following tests:
- 1. You have a tax home in a foreign country.
- 2. You meet either the Internal Revenue Service’s bona fide residence or physical presence requirements.
Basically, your tax home is your regular or principal place of business, employment or post of duty. The IRS wants to be sure that you actually moved abroad rather than simply traveled there periodically to earn money. And you’re not totally off the tax hook. If the foreign country has income tax laws, you cannot claim to be exempt from them.
The second test requires you to establish a genuine home in the country for a full tax year or, failing that, spend at least 330 days abroad earning your income.
One final caution — If that dream job shifts to the Virgin Islands and you think you will get benefit from the tax exclusion while working on your tan be aware that U.S. possessions are not foreign countries for tax purposes.
Foreign tax credit
If you end up being taxed by the foreign country on the income earned in that country and are subject to U.S. tax on the same income, you may be able to take either a credit or an itemized deduction for those taxes. Taken as a deduction, foreign income taxes reduce your U.S. taxable income. Taken as a credit, foreign income taxes reduce your U.S. tax liability. In most cases, it is to your advantage to take foreign income taxes as a tax credit.
Caution, if you choose to exclude either foreign earned income or foreign housing costs, you cannot take a foreign tax credit for taxes on the income you excluded.
Navigating the tax rules for foreign income can be complex. So before you pack the sunscreen, give us a call to see what the tax impact will be. We are here to help!
About Blackman & Sloop CPAs, P.A.:
Blackman & Sloop is a full-service CPA firm headquartered in Chapel Hill, North Carolina and is actively involved in auditing, taxation, management consulting, financial planning, and related services. The firm directs a large part of its services toward providing management with advice on budgeting, forecasts, projections, financing decisions, financial analysis, and tax developments. The firm also performs review and compilation services and prepares not-for-profit, corporate, individual, estate, retirement plan, and trust tax returns as well as technology consulting services regarding installation and training on QuickBooks. Blackman & Sloop provides services in Raleigh, Durham, Chapel Hill, RTP, Hillsborough, Pittsboro, Charlotte, and the rest of North Carolina. To find out more please visit http://www.blackmansloop.com
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