This post has been updated to reflect the new inflation amount per the 2018 tax reform bill.
People definitely are peripatetic. Millions of us move every year, with around 56 million crossing national borders to new homes.
But there's one thing Americans who go abroad, be it for work or purely personal reasons (love and adventure join career as the top three reasons for expatriation), cannot leave behind. The U.S. tax code.
Because Uncle Sam relies on a worldwide tax system, the Internal Revenue Service gets a portion of citizens' or resident aliens' incomes regardless of where in the world they earn their money.
There are, however, some tax benefits for U.S. workers abroad.
Excluding foreign-earned income: The most notable tax break is the foreign earned income exclusion, or FEIE. This allows workers abroad who meet certain requirements to legally avoid paying U.S. tax on some of their foreign wages.
The exclusion amount is adjusted annually for inflation.
For the 2018 tax year, it's $104,100. $103,900. In March, the IRS revised this amount so that it complies with the requirements of the Tax Cuts and Jobs Act, enacted on Dec. 22, 2017, that the Chained Consumer Price Index be used to calculate annual inflation adjustments. That's two grand more than the 2017 exclusion amount of $102,100.
To claim the FEIE, you must meet all three of the following requirements:
- Your tax home must be in a foreign country.
- You must have foreign earned income.
- You must be either
- A U.S. citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year, or
- A U.S. resident alien who is a citizen or national of a country with which the U.S. has an income tax treaty in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year, or
- A U.S. citizen or a U.S. resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.
These same requirements also apply to the other major tax benefit allowed Americans working in another country, the foreign housing exclusion or deduction.
Housing tax break, too: Overseas workers also might be able to exclude (or deduct if self-employed) from gross income a certain amount of housing costs.
We are talking about the yet-to-be-simplified Internal Revenue Code, so it's not as simple as just writing off your London flat's rent. There's plenty of added math.
First, start with your residential expenses. And note that the IRS says they must be reasonable. Lavish or extravagant, such as a replica of the Sun King's palace, won't pass the tax man's muster.
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More plebian accommodations, however, also have tax limits. Specifically, a housing ceiling and a base amount are used to calculate an overseas taxpayer's ultimate tax break for his or her residential costs abroad.
The IRS generally sets a ceiling of 30 percent of the annual inflation-adjusted FEIE. For 2017, that's $30,630 ($102,100 x 30%). The $103,900 FEIE in 2018 produces a $31,170 ceiling.
Then the excludable/deductible housing amount is affected by what the base housing amount, which also is a percentage of the annual FEIE amount. The exact figure is 16 percent, making the 2017 amount $16,336 ($102,100 x 16%). In 2018, the foreign housing tax break will bump up a bit to $16,624 thanks to the larger FEIE of $103,900.
To use the exclusion, your qualifying housing costs must exceed the applicable tax year’s base 16 percent amount, or to use realty speak, the expense floor. When they do, you can exclude (or deduct) the total of your qualifying expenses up to the maximum amount allowed for the tax year.
More relief in higher-rent locales: All of us HGTV House Hunters International fans know that sometimes it's hard to find the kind of residential bargain that the IRS will reward.
Not to worry. There's also tax help for U.S. citizens and resident aliens who live and work in countries with higher housing costs.
The Internal Revenue Service also releases a list of high-rent international cities on an annual basis. These findings, however, are issued in a separate announcement, usually in the spring instead of the fall with the general inflation adjustments.
In March of this year, the IRS issued the 2017 list of countries that the U.S. State Department has identified as having high housing costs.
Based on this data, U.S. taxpayers in those locales could get a larger housing exclusion.
For example, a U.S. worker who for all of 2017 rents a home in Bahrain, the top expat destination this year, can exclude from income the difference between $48,300 (the IRS announced limitation for that Mideast nation) and this year's $16,336 base housing amount, or $31,964 in housing costs.
That's a nice jump from the basic 2017 tax year housing exclusion of $14,294 housing exclusion allowed U.S. taxpayers working this year in locales with less costly housing.
The 2018 high-housing list will be published by the IRS next spring.
Whatever reason you're headed abroad, enjoy soaking up another country's culture. And use these tax breaks to make sure you pay the U.S. Treasury less so that you can spend those tax savings exploring your expatriate home.
This look at changes to the foreign earned income exclusion amount
and how that inflation adjustment affects the foreign housing tax break
is Part 8 of the ol' blog's series on 2018 inflation adjustments.
You can find links to all 2018 inflation posts in the first item:
Income Tax Brackets and Rates.
Note: The 2018 figures apply to 2018 tax returns that are due in 2019.
For comparison purposes, you'll also find 2017 amounts to be used
in filing 2017 tax returns due next April.
More foreign tax info: You can read more about foreign tax issues in general in IRS Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad.
The IRS also has special pages with details on the foreign earned income exclusion. That page doesn't yet reflect current inflation adjustments, but it does have a link to an interactive tool where you can see if you're able to exclude income in a foreign country.
There's also the IRS page with more on the housing exclusion and the IRS' online index for taxpayers with international filing requirements.
You also might find these items of interest:
- Expatriations on pace to set a new record
- American expatriates don't like paying U.S. taxes
- Manafort indictment offers foreign bank account tax lessons
