Exclusions : US Expat Taxation

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Other sources of income like capital gains, rent, interests , dividends and similar ones, not requiring personal efforts, do not count as ‘earned’ and hence cannot be included in the tax-free limit of foreign earned income.

If your spouse is also working abroad then you can deduct an additional $95,100 as tax exclusions. The exclusion is not automatically deducted. You need to file the return, fill out Form 1040 as well as other appropriate forms for claiming exclusions while preparing your Expatriate Tax Returns.

Other then exclusion on earned income, US expats can have exclusion on housing costs also which will need to be factored in during the yearly Expat Tax Preparation. This exclusion varies from country to country. In general, US citizen living abroad can claim some part of their house rent or living cost as exclusion. One of the mandatory requirements for doing so is that you need to produce a proof that you have been living in the foreign country for the whole year and also that you were absent physically from US for at least 330 days in the full annual year.

The limit to the maximum housing expense for most of the foreign cities is 30% of $95,100 (foreign earned income exclusion) that comes out to $52,216. This percentage may have certain exceptions based on the city of residence. The housing expense in foreign country exclusion is calculated by subtracting the base amount (which is 16% of the foreign income exclusion amount) from the foreign housing expense that you are qualified for.

While filing your income tax, if you want to know what exclusions you are eligible and the caps on the exclusions as well as you want to claim the exclusions, then you need to fill in Form 2555 along with the return. This form can be obtained from the IRS government website. Any income that you may have earned while on a visit to the US, during the annual year, cannot be included in the foreign income exclusion. As the income has been made in US therefore it is subject to US tax.

An experienced Expat CPA offering US Tax Service for Americans Living Abroad and offering Expatriate Tax Services is essential to limit your tax liability and protect yourself from a costly IRS audit.