Publications
The Global Economy: Living and Working Abroad
In today’s global economy, it is becoming more common for U.S. employees
to work in another country for a period of time. These assignments may
last for a few months, or for a few years. As with any move, issues of
residency and domicile will arise, but living and working abroad also
raises international tax issues.
Will My Domicile and Residence Change?
Living and working abroad, even for a period of years, does not affect
a U.S. citizen’s domicile unless it is the citizen’s intention to change
domicile. Domicile is the place one intends to make one’s home,
and if there is an intention to return to the United States eventually,
the fact of temporarily living abroad will not be viewed as a change of
domicile. However, depending on the exact country involved, it may
be helpful to explore whether a change of residency will be
advantageous for income tax reasons.
How Will I be Taxed on My Foreign Earnings?
The tax consequences of working abroad will differ based on a variety
of factors, including the identity of the host country, whether there
is a tax treaty in effect between the U.S. and the host country
and, if so, the terms of that treaty, and whether the employer is a
governmental employer or a private business. Thus, it is necessary
to analyze each case individually to determine what impact foreign
income will have on tax liability. One rule to keep in mind, however:
U.S. citizens working abroad will almost always have to file U.S.
income tax returns.
Income from U.S. sources earned while you are living abroad, such as
investment income or gains realized from the sale of a house, will be
taxed by the U.S. In general, the U.S. also taxes the income of U.S.
citizens earned abroad. Nonetheless, because the income a U.S. citizen
earns from a foreign source is likely to also be taxed by the country
where it is earned, there is a deduction for taxes paid to foreign
governments, to prevent double taxation. In most cases, the total tax
paid on foreign source income will equal either the U.S. tax or the
foreign tax, whichever is higher.
investment income or gains realized from the sale of a house, will be
taxed by the U.S. In general, the U.S. also taxes the income of U.S.
citizens earned abroad. Nonetheless, because the income a U.S. citizen
earns from a foreign source is likely to also be taxed by the country
where it is earned, there is a deduction for taxes paid to foreign
governments, to prevent double taxation. In most cases, the total tax
paid on foreign source income will equal either the U.S. tax or the
foreign tax, whichever is higher.
The Foreign Earned Income Exclusion. Depending on the length of time a
U.S. citizen lives abroad, he or she may qualify for an exclusion of
certain foreign earned income for U.S. income tax purposes. If the
applicable foreign tax rate is lower than the U.S. rate, qualifying for
the exclusion can result in a significant increase in after-tax income.
The amount of foreign income that can be excluded from U.S. adjusted
gross income is adjusted annually. For the year 2000, qualifying
individuals may exclude $76,000. This amount is scheduled to rise to
$78,000 for 2001, and to $80,000 for 2002. Thereafter, it will be
adjusted according to a cost-of-living calculation. For purposes of the
exclusion, foreign earned income does not include pensions, or amounts
paid by the U.S. government to government employees.
U.S. citizen lives abroad, he or she may qualify for an exclusion of
certain foreign earned income for U.S. income tax purposes. If the
applicable foreign tax rate is lower than the U.S. rate, qualifying for
the exclusion can result in a significant increase in after-tax income.
The amount of foreign income that can be excluded from U.S. adjusted
gross income is adjusted annually. For the year 2000, qualifying
individuals may exclude $76,000. This amount is scheduled to rise to
$78,000 for 2001, and to $80,000 for 2002. Thereafter, it will be
adjusted according to a cost-of-living calculation. For purposes of the
exclusion, foreign earned income does not include pensions, or amounts
paid by the U.S. government to government employees.
There are two ways to qualify for the foreign earned income exclusion.
First, you will qualify if you can prove that you are a bona fide
resident of a foreign country. To be a bona fide resident, you must have
maintained a bona fide residence abroad for an entire taxable year,
without interruption. Factors indicating a bona fide residence include
establishing a home abroad, obtaining a resident visa, assimilating into
foreign society, payment of foreign taxes, relocating your family, and
obtaining a foreign driver’s license. Although the requirements of
proving bona fide residence are fairly stringent, for many people this
way of qualifying for the exclusion will be easier to meet than the
second way. The second way of qualifying for the foreign earned income
exclusion is to prove that you have been physically present in a foreign
country for 330 days in a 12 month period. For people whose employment
requires frequent return to the U.S., the “presence test” may be
impossible to pass.
First, you will qualify if you can prove that you are a bona fide
resident of a foreign country. To be a bona fide resident, you must have
maintained a bona fide residence abroad for an entire taxable year,
without interruption. Factors indicating a bona fide residence include
establishing a home abroad, obtaining a resident visa, assimilating into
foreign society, payment of foreign taxes, relocating your family, and
obtaining a foreign driver’s license. Although the requirements of
proving bona fide residence are fairly stringent, for many people this
way of qualifying for the exclusion will be easier to meet than the
second way. The second way of qualifying for the foreign earned income
exclusion is to prove that you have been physically present in a foreign
country for 330 days in a 12 month period. For people whose employment
requires frequent return to the U.S., the “presence test” may be
impossible to pass.
In addition to the foreign earned income exclusion, U.S. citizens may
also qualify for U.S. income tax deductions or exclusions for certain
housing costs.
also qualify for U.S. income tax deductions or exclusions for certain
housing costs.