Taxes Abroad

The tax code says that if you're a U.S. citizen or a resident alien of the United States and you live abroad, the IRS taxes your worldwide income. You make it, they tax it – no matter where you make it. But you do get a nice exclusion for tax year 2024. 

The maximum foreign earned income exclusion is adjusted annually for inflation. For 2024, the maximum exclusion has been increased to $126,500. 

There is also an amount of qualified housing expenses eligible for exclusion. Generally, the maximum amount of housing expenses is limited to $37,950 for 2024. For such computation, you need to determine your base housing amount (line 32 of Form 2555) which is $55.30 per day ($20,240 per year) for 2024, multiplied by the number of days in your qualifying period that fall within your tax year. 

For more details, see “Housing Amount” in Chapter 4 of Publication 54, “Tax Guide for U.S. Citizens and Resident Aliens Abroad.” The amount of qualified housing expenses eligible for the housing exclusion and housing deduction may be higher for your foreign geographic location. See “Limit on housing expenses,” also in Chapter 4. 

The limitation on housing expenses is generally 30% of the maximum foreign earned income exclusion, so for tax year 2020, the housing amount limitation is $32,280. However, the limit will vary depending upon the location of your foreign tax home and the number of qualifying days in the tax year. You’ll have to figure the exclusion first, because it’s limited to your foreign earned income minus any foreign housing exclusion you claim. 

How to Qualify 

To qualify for the foreign earned income exclusion, the foreign housing exclusion or the foreign housing deduction, your tax home must be in a foreign country, and you must be one of the following: 

• A bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year (Bona Fide Resident Test). 

• A taxpayer outside the U.S. for at least 330 full days during any period of 12 consecutive months (Physical Presence Test). 

The Bona Fide Resident Test is not applicable to nonresident aliens. If you declare to the foreign government that you are not a resident, the test is not satisfied. Eligibility for the exclusion could also be affected by some tax treaties. 

Federal workers – such as those in the Foreign Service – and military members are governed by special rules. For details, see IRS Publication 54 – Tax Guide for U.S. Citizens and Resident Aliens Abroad. 

To apply for any of these tax breaks, use Form 2555. Our 1040.com interview will help you complete the right forms.