Tips and Tricks to U.S. Income Tax Liability for Workers Abroad

As the only country in the world requiring U.S. citizens and green card holders to file domestic taxes even when working abroad, you may be surprised to find that any foreign income earned is still subject to U.S. tax requirements. Failure to adequately file your U.S. taxes can result in heavy fines and penalties.

Fortunately, there are a variety of exceptions and strategies available to U.S. citizens working abroad, and a knowledgeable Boston international tax attorney can help you legally reduce your total U.S. tax obligations. Below, we outline a few key steps to ensure your U.S. tax obligations are manageable and cost-efficient while you’re working abroad.

The Basics

The only way to avoid filing U.S. taxes as a foreign worker abroad is to expatriate and effectively renounce your U.S. citizenship. Because there are a variety of benefits to holding U.S. citizenship - and because the process of repatriating can be extremely complex - it’s far wiser to continue to file your U.S. taxes. Under the current tax code, workers must pay taxes on all earned income, even if the majority of your income was earned in a foreign country. However, many U.S. citizens working abroad qualify for the foreign earned income exclusion and understanding how this exclusion works is key to keeping your tax bill at a minimum.

Understanding the Foreign Earned Income Exclusion

If you’re a U.S. citizen working abroad, you may qualify you may qualify to exclude your income up to an amount of your foreign earnings. Adjusted annually for inflation, it’s possible to exclude as much as $100,000 of earned foreign income from your U.S. tax obligations. The Foreign Earned Income Exclusion, or FEIE, only applies to earned income, such as salary, wages, or consulting fees. The FEIE won’t cover income such as interest, dividends, pensions or capital gains.

In order to qualify for FEIE, you must satisfy one or both of the following tests:

Physical presence test: U.S. citizens will meet the physical residence test if you spend more than 330 full days in foreign countries in a consecutive 12-month period, starting or ending in the tax year in question. If you enter the U.S. even once during this 12-month period, you will not qualify for FEIE.

The bona fide resident test: U.S. citizens will satisfy this test if they can establish they have set up a residence in a new country for an entire year, and do not have any plans to return to the U.S. in the immediate future. Workers on temporary assignments will not qualify for this exception.

If you’re unsure whether you meet any of the above requirements, we recommend contacting a Boston international tax lawyer.

The Tax Home Requirement

Even if you meet one or both of these tests, you still may not be able to claim FEIE if you don’t additionally meet the tax home requirement. To qualify for FEIE, it’s crucial that your tax home be outside the U.S. A tax home is the general area of your main place of business, employment, or post of duty, regardless of where you maintain your family home. It is the place where you are permanently or indefinitely engaged to work as an employee or self-employee.

Why You Should Contact an International Tax Lawyer

To claim FEIE, you must file Form 2555 to your tax return. However, this form is filled with confusing language and opportunities to effectively ruin your chances of obtaining FEIE when filing U.S. taxes. Your error could mean all of your worldwide earnings are taxed, significantly raising your total tax obligations. Instead, consider contacting a Boston international tax lawyer like Kevin E. Thorn, Managing Partner at Thorn Law Group, who can help you properly file your tax forms. Most attorneys will offer a flat fee to handle your U.S. tax filing and engaging their services up front can save you thousands come tax time.