Industries: International Business
Services: Tax
By: Megan Miller
An exciting job offer, or perhaps job transfer, has been presented to you. The thought of living abroad sounds enticing. Before packing your bags, gather the facts about how this may affect you financially, and more specifically, what happens once you are an expatriate.
U.S. individual income tax returns for U.S. citizens and residents are typically due on April 15, with the ability to request an extension of time to file until October 15. If the taxpayer’s tax home is outside of the United States on April 15, he or she is granted an automatic extension until June 15. This may be helpful because most countries do not conform to the same tax deadlines as those in the U.S.; yet, the U.S. filing obligation continues and you will need to gather sufficient information to calculate that tax liability.
A primary consideration for tax relief while living abroad is the foreign earned income exclusion, which allows an expatriate to exclude earned income from his or her U.S. taxation. In numerous cases, expatriates electing to claim the exclusion will not have met the bona fide foreign residence or physical presence tests by the original or extended deadlines in the first year of living abroad, which is required to claim the foreign earned income exclusion. When this happens, an individual is able to apply for an additional extension of time to file until 30 days after the applicable test is anticipated to be met. For tax year 2021, the maximum foreign earned income exclusion is the lesser of the foreign income earned or $108,700 per qualifying person; therefore, it can be very beneficial to plan accordingly to use it, if available.
In addition to the foreign earned income exclusion, a foreign housing exclusion is available for excess foreign housing costs. The rules for qualifying for this exclusion are the same as for the general exclusion – the taxpayer must have a foreign tax home and meet either the bona fide residence or physical presence tests.
An individual’s foreign housing exclusion is calculated by taking the total of the taxpayer’s foreign housing expenses for the year minus the base housing amount. The base housing amount is set as a percentage, currently 16%, of the taxpayer’s foreign earned income exclusion limitation. A taxpayer’s housing expenses may not exceed a certain limit, which varies depending upon the location in which the taxpayer incurred the housing expenses. The foreign housing exclusion applies only to amounts considered paid for with employer-provided amounts included in an individual’s compensation. A taxpayer’s foreign housing expenses may not exceed the individual’s total foreign earned income for the taxable year.
Housing expenses are the expenses paid or incurred by an individual, or on his or her behalf, for living accommodations while the taxpayer is a qualified individual. They include reasonable expenses actually paid or incurred for housing in a foreign country for the taxpayer and, if they lived with the taxpayer, for the individual’s spouse and dependents. If a part-year exclusion is in effect, housing expenses for the part of the year that the taxpayer qualifies for the foreign earned income exclusion should only be considered.
Eligible expenses include rent and related expenses such as utilities, repairs, occupancy taxes, and residential parking. Housing expenses do not include the cost of domestic labor, such as maids or gardeners, telephone charges, television subscriptions, deductible mortgage interest expense, property taxes, or depreciation. A taxpayer cannot include in housing expenses the value of meals, nor the value of employer-provided lodging not included in the taxpayer’s gross income.
As an employee working abroad, careful consideration should be given to the foreign earned income and foreign housing exclusion when compared to other tax benefits like the foreign tax credit for the income taxes paid in another country. Taxpayers should analyze which is more beneficial given their particular situations, so it is wise to consult with a tax advisor who is familiar with the benefits of each prior to making a final decision.