The Quick & Dirty Guide to Paying Taxes on Foreign Income

If you are a U.S. citizen and have landed a job overseas, you still have to pay U.S. income taxes but you will be eligible for the Foreign Earned Income Exclusion.  In order to claim this tax benefit, (1) your main place of business or employment must be in a foreign country, (2) you must have earned foreign income, and (3) you must have established a bona fide residence in a foreign country for an entire tax year or have been physically present at the foreign country for more than 330 days.  For 2009, the foreign earned-income exclusion is $91,400, an amount adjusted each year to reflect inflation.  This means you can exclude up to $91,400 in foreign earned income from your total income.  If you have earned more than this amount, you will have to pay U.S. taxes on the difference.   However, you can also deduct any foreign tax you have already paid on your income.

In addition, you may also be eligible to claim the Foreign Housing Exclusion and/or the Foreign Housing Deduction.  This part gets a little tricky.  First, you have to determine your “housing amount” by subtracting the base housing amount ($91,400 x 16% /365 days x number of qualifying days) from your total housing expenses.  Then you have the following three options:

  • This is the entire amount you can exclude if all of your housing expenses were paid by employer-provided income (i.e., your company pays your salary and you use part of your salary to pay your housing expenses).
  • This is the entire amount you can deduct if all of your housing expenses were paid by self-employment income.
  • BUT if your foreign earned income includes both employer-provided income and self-employment income, you will have to figure out what percentage of your total foreign earned income originated from each source and use that to determine how much housing amount to exclude and deduct. For example, if 70% of your total foreign earned income is from an employer and 30% is from self-employment, then 70% of your housing amount is eligible for the Foreign Housing Exclusion and 30% for the Foreign Housing Deduction.

The total amounts of your Foreign Earned Income Exclusion, Foreign Housing Exclusion, and Foreign Housing Deduction, however, cannot exceed your total foreign earned income.  When filing your tax return, you will fill out the Form 2555-EZ or the Form 2555 and attach it to your Form 1040.  See Publication 54 for more information and if you have any questions, please leave a comment.

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