Can I Exclude Foreign Income on my U.S. Tax Return? by Arthur J. Dichter, JD
Posted on May 02, 2018 by Arthur Dichter
Due to the complexity of the U.S. tax system, it is not uncommon for foreign persons to accidentally become U.S. tax residents subject to taxation on their worldwide income based on such factors as the number of days they spend in the country.
Individuals who were born in the United States are automatically U.S. citizens subject to U.S. taxation on their global income. However, when an individual has a “tax home” outside the United States and meets other requirements, he or she may be able to exclude a certain amount of foreign earnings from U.S. taxes.
Under U.S. tax laws, a person’s “tax home” is generally where the person lives in order to maintain a place of business, employment or post of duty, regardless of where he or she maintains a family home. In fact, an individual’s tax home may be different from his or her country of residence.
The foreign earned income exclusion may apply when a U.S. citizen or resident alien is a bona fide resident of a foreign country (or countries) for an uninterrupted period that includes one entire calendar year, or he or she must meet a physical presence test based on his or her unique facts and circumstances. Factors considered when applying the bona fide residence test include an individual’s intention to remain in a country, the purpose of his or her travels, and the nature and length of a stay abroad.
Just as the U.S. relies on a physical presence test to determine whether an individual qualifies as a U.S. tax resident alien, it also counts the aggregate number of days an individual is physically present in a foreign country to determine whether or not income earned in that country can be excluded from U.S. tax exposure. The exact calculation is based on an individual’s physical presence in a foreign country during an entire taxable year or a minimum of 330 full, 24-hour days over a 12 consecutive month period. The 330-day threshold need not occur consecutively; rather it is based on a cumulative amount of time over 12 consecutive months. Excluded from the calculation are days of travel into and out of the foreign country as well as days in which an individual leaves the foreign country for less than 24-hours.
For 2018, the maximum amount of foreign income a taxpayer may exclude from U.S. taxes is $104,100, which is indexed annually for inflation. It is important to note, however, that the exclusion applies only to “earned” income; passive income from sources such as interest and dividends do not qualify. Any foreign tax credits that might otherwise be available are reduced on a proportionate basis to the amount of foreign income excluded. Moreover, while individuals whose tax home is outside the United States will receive an automatic two-month extension of time to file their U.S. income tax return and pay any taxes due, interest on the tax that is owed will accrue during the extension period.
It is advisable that U.S. taxpayers seek the advice of experienced international tax and accounting professionals to assess their unique personal situation and develop appropriate strategies for minimizing tax liabilities, especially when taxpayers have homes and assets in multiple countries. While individuals whose tax home is outside the United States receive an automatic two-month extension of time to file their U.S. income tax return and pay any taxes due, however, interest will accrue during the extension period on any tax that is owed.
About the Author: Arthur Dichter, JD, is a director of International Tax Services with Berkowitz Pollack Brant, where he works with multi-national businesses and high-net worth foreign individuals to structure their assets and build wealth in compliance with U.S. and foreign income, estate and gift tax laws. He can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at firstname.lastname@example.org.
Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.