We all look for ways to minimize our U.S. tax bill and to maximize our freedom abroad. We all desire to simplify our tax and reporting responsibilities. We want to think less about taxes…and enjoy more of our international experience.
The good news is, if you approach your taxes in the right way, you can save yourself from the stresses of Tax Day every year…free up thousands of dollars that you’re legally entitled to that might otherwise go to the IRS…and avoid unnecessary and costly non-disclosure penalties.
If your move abroad includes earning income by working for a foreign company or being in business for yourself, you may qualify for two very valuable tax benefits:
- Foreign Earned Income Exclusion
- Foreign Housing Exclusion/Deduction
Yes, these both are the huge tax break that they sound like!
Here’s how they work.
Foreign Earned Income Exclusion (FEIE)
The U.S. taxes its citizens on worldwide income—all the income you earn abroad as well as the income you earn in the U.S. The FEIE gives you a tax exclusion on up to $99,200 of your overseas earned income. That means no U.S. taxes on your first $99,200.
If you qualify, you and your spouse can each earn income up to $99,200 for 2014 that is excluded from U.S. income taxation. This can mean thousands of dollars annually freed up for your foreign lifestyle.
This exclusion provides you with a great opportunity to save on U.S. taxes. In fact, it’s one of the top three tax benefits available only to those Americans earning income overseas. Whether you are employed abroad, provide international consulting, or run your own foreign business, the FEIE can reduce your U.S. tax bill.
However, working abroad and earning less income than the FEIE exclusion does not exempt you from filing a U.S. income tax return. In fact, in order to qualify for it, you must actually file a U.S. tax return. Yes, that’s right; you have to file a tax return in order to receive its benefits.
Foreign Housing Exclusion/Deduction
Qualifying for the FEIE also qualifies you for the Foreign Housing Exclusion/Deduction. This exclusion/deduction applies to foreign housing that you inhabit when employed overseas.
So if your employer overseas pays for your housing…or if while self-employed abroad you pay for accommodation…you could be entitled to this very generous tax break.
If you qualify for either the Foreign Housing Exclusion/Deduction, the IRS will allow you a foreign housing exclusion or deduction that amounts to an additional 16% of your FEIE. For 2014, that may be a deduction or exclusion of up to $15,872—or $43.48 per day.
For full details on how to file to receive this exclusion, or for more details about the FEIE, check out this resource.