How to Be Exempt From Federal Taxes When Working Out of the Country
Generous federal tax benefits are available to expatriates.
In principle, U.S. citizens and permanent residents are liable for taxation on their worldwide income. The Internal Revenue Code, however, offers generous tax breaks for expatriates that, in many cases, can result in a 100 percent deduction. These tax breaks are based on either working abroad or paying taxes to a foreign government.
Foreign Earned Income Exclusion
The foreign earned income exclusion works like a tax deduction – you can exclude from your taxable income a certain amount of income you earned while "physically present" overseas, according to the Internal Revenue Service definition, regardless of whether you were working for a U.S. employer and regardless of the currency or where the payment is received. Although the amount of the exclusion is adjusted annually, as of the date of publication it was $95,100 if you spent the entire year abroad. If you spent less than the entire
year abroad, you must reduce this exclusion by the proportion of the year you spent in the U.S. – to $47,550 if you spent half the year in the U.S. for example. File Form 2555 along with your 1040 to claim this exclusion.
Foreign Housing Deduction
The foreign housing exclusion allows you to exclude a portion of your housing expenses incurred while working abroad. It applies to rent, utilities and homeowner's insurance but not to extravagant expenses. You calculate it by subtracting 16 percent of your foreign earned income exclusion from your total housing expenses. The maximum housing expenses you can use to calculate the exclusion varies according to the cost of living at your foreign location. Once you calculate the exclusion, you can subtract it from your taxable income. Certain restrictions apply when you use this exclusion together with the foreign earned income exclusion. You will use form 2555 to claim this exclusion as well.
"Tax Home" RequirementsSource: finance.zacks.com