Do I Need to Pay U.S. Taxes on Foreign Earned Income?

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American citizens and permanent residents who live abroad and work also need to report their foreign income to the IRS. Income you receive in any part of the world counts as part of your taxable income, and you are required to pay income tax on it unless you qualify for the foreign income exclusion.

Foreign Income

As with any other type of income, any foreign income you have is subject to federal income tax. You must report your foreign income whether or not you receive the equivalent foreign documents of a W-2 form or a 1099 form. The regulations and rules regarding filing taxes, estate and gift tax returns and paying estimated taxes are the same for citizens living in the country as well as citizens who live or work outside the United States. However, under certain conditions, you may be able to qualify for an exception to these rules.

Filing Foreign Income Tax

To file your taxes to report your foreign income, you can use the IRS Form 2555 if you choose to itemize your deductions or Form 2555 EZ if you choose to take a standard deduction, which is a specific amount established by the IRS. As of 2011, the standard deduction is $10,400. If you live in the United States, you have until April 18 to file your taxes. If you live abroad and your tax home is also abroad, you may be eligible for a two-month filing extension. However, the IRS charges interest for the taxes you owe until the moment you pay them.

Foreign Income Tax Exclusion

Under certain conditions, you may also be eligible for an exception to the rules that generally apply to foreign income: the foreign income tax exclusion. This exclusion applies to American citizens or permanent residents whose tax home is abroad and who are bona fide residents of a foreign country for at least an entire tax year. It also applies to nationals of countries with which the United States has an income tax treaty in effect, being bona fide residents of that foreign country for at least one tax year or being physically present there for at least 330 days. If you do not meet any of these conditions--for instance, if you work outside for only part of the year--you do not qualify for the exclusion.

Foreign Income Tax Exclusion Amounts

As of 2011, you can exclude any foreign income that you receive from your total wages (if you meet the requirements above) up to $92,900. This amount is adjusted annually to reflect inflation variations. This exclusion is voluntary, and if you choose to claim it, you can do so by filing the correct lines on Form 2555. You can also claim a foreign housing exclusion together with your foreign income exclusion. If you do so, the foreign income exclusion you can claim is determined by the housing exclusion you claim. (The foreign income exclusion minus the foreign housing exclusion.) If you claim the exclusion, you cannot claim the foreign tax credit on your return.

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