If you live outside the U.S., and you are a U.S. citizen or a resident alien of the U.S., you are taxed on the income that you earn anywhere in the world. Nevertheless, you may be eligible to exclude from your income a portion of your foreign earnings that changes each year due to inflation. For the year 2014, you can exclude up to $99,200 of your foreign earnings. Additionally, you may be able to exclude or deduct specific foreign housing costs. You may also be able to exclude from your income the value of housing and meals provided by your employer.
When the Foreign Earned Income Exclusion Does Not Apply
However, with respect to the foreign earned income exclusion, foreign housing deduction, and foreign housing exclusion, foreign earned income excludes any amounts that employees receive from the United States or its agencies. Furthermore, if you are an employee of the U.S. government, and are compensated by a U.S. agency that appointed you to a foreign government to carry out certain responsibilities, and the foreign government reimburses the agency, then your pay is considered to be from the U.S. government, and is ineligible to be excluded or deducted.
Requirements of Claiming the Foreign Earned Income Exclusion
In order to claim an exclusion for foreign earned income, or foreign housing, or to claim a deduction for foreign housing, you are required to have foreign earned income, and your tax home has to be in a foreign country. In addition, you are required to be one of the following:
- A U.S. citizen who resides in a foreign country or countries. You must be a resident of that country for a continuous period of time, including an entire tax year.
- A U.S. resident alien whose citizenship is with a country that has an income tax treaty with the U.S., and who resides in a foreign country or countries. You must reside in that country for a continuous period of time, including an entire tax year.
- A U.S. citizen or resident alien whose physical presence in one or more foreign countries is for a minimum of 330 full days in any consecutive 12-month period.
Your Tax Home
Your tax home is the area in which your principal place of business, employment, or assignment is located, regardless of where your family home is situated. Your tax home can also be described as the place in which you work as an employee, or are self-employed, permanently or indefinitely.
If you do not have a usual or principal place of business because of the type of work that you do, your tax home could be where you normally live. However, if you do not have a usual or principal place of business, nor someplace where you normally reside, then you are described as an itinerant, and your tax home is any place where you work.
Temporary or Indefinite Tax Home
The area in which your tax home is located is dependent on the nature of your assignment, specifically whether it is temporary or indefinite. If you are away from your U.S. tax home on business, you may be eligible to deduct the expenses you incur while you are away from home; such expenses include travel, meals, and lodging. However, you would be ineligible for the foreign earned income exclusion.
If your new work assignment lasts for an indefinite length of time, then your new workplace is your tax home, and you would be unable to deduct any relevant expenses. But if the site of your new tax home is in a foreign country, and you comply with the other requirements, then you may qualify for the exclusion of foreign earned income.
If you anticipate that your employment away from home at one location will continue for one year or less, and it does, in fact, last for that length of time, then your employment is considered to be temporary. But if you anticipate that it will continue for more than one year, and it does, in fact, last for more than one year, then it is considered to be indefinite.
Should I Consult an Attorney?
You may have some concerns or questions about whether you qualify for the foreign earned income exclusion and deduction of housing costs. In that case, you should consult a tax attorney or tax adviser who can help you navigate the various rules and regulations, and exceptions.