Thinking of exploring the world, living a nomadic lifestyle, or just being with family that lives abroad? Especially now that technology and digitalization enable you to work remotely? What you may not know is that you can potentially exclude some of that income from your U.S. taxes.
In general, U.S. citizens are taxed on their worldwide income and then receive a foreign tax credit for any portion of their income earned outside of the U.S. Theoretically, the U.S. is only taxing the difference between U.S. tax rates vs. foreign tax rates, and your taxes would be effectively the higher rate of the two countries.
However, the U.S. does allow its citizens and resident aliens to exclude up to $112,000 (for 2022 and indexed yearly for inflation) of their income, if they meet the following requirements:
- Have a tax home in a foreign country
- Meet either the bona fide residence test (an uninterrupted period that includes the entire tax year) or physical presence test (330 days abroad)
- Have foreign earned income (loosely can include payroll from a U.S. employer or self-employment income)
You can use the IRS interactive tax assistant to determine if your foreign income is eligible for exclusion.
If you are married and both of you live abroad, and meet the definitions outlined, both of you can exclude up to $112,000 of income on your tax return.
Other taxable items such as social security income, dividends, interest, and pension checks would still be taxable in the U.S. Your tax rate would still be based upon your total income (including the excluded foreign income). However, you would still benefit as the foreign income is excluded from your tax return. Depending on your residence before moving abroad, your state might have different reporting requirements and might not allow any foreign exclusions.
If you meet the above requirements, you can claim the exclusion of income.
The taxation of foreign activities can get complicated and difficult to decipher, but Cray Kaiser can help. Call us at 630-953-4900 to help you determine the best treatment for your individual case along with any state complications.