Working Overseas and US Taxation
Foreign Earned Income Exclusion
There is a law that allows for income earned while one is living overseas to be excluded from your US income taxes. This is known as the foreign earned income exclusion under Internal Revenue Code Sec 911. In order to qualify, you must either have been physically present in the foreign country for 330 days or be considered a bona fide resident of that foreign country. Employees of the US Government generally do not qualify.
IRC Section 911 (Sec 911) allows for an election to be made, to exclude up to $91,500 in foreign earned income for the 2010 tax year. You must file a form 2555 with your tax return, claiming the election. Although the election is supposed to be made pursuant to a timely filed tax return with extensions (form 2350), there is a provision within the Treasury Regulations that permits late filings to be accepted. Regulation Section 1.911-7 describes the procedures necessary to file the form 2555 with your delinquent tax return to obtain relief. The total earned income is reported on line 7 of your form 1040 and the exclusion amount is then subtracted as a negative number on line 21.
Not all income will be excludible under IRC 911, because some income, such as income earned from US Government entities, is not excludible. There are other restrictions and tax benefits to working overseas as well, such as housing allowance exclusions and
a person considering working overseas should read section 911 to become familiar with the rules.
TIP: Fill out IRS form 673 and give it to your employer to eliminate withholding on wages falling under the exclusion, that will give you more money in your pocket!
Do I have any other option if my election is denied? Yes, you can claim the foreign income taxes that may have been withheld from your foreign wages as a credit or deduction against your US income tax. File form 1116 to obtain the credit and file it with your income tax return, listing the credit on line 47 of your form 1040 tax return.
Caution: There are strict disclosure requirements for overseas bank accounts that require annual filings where the penalties for non compliance are very severe (see Expatriates). (FATCA)
The Internal Revenue Service publication 54 has valuable information regarding the filing requirements for individuals working and living overseas.