Congress has provided substantial tax benefits for U.S. citizens working in another country. This affects what a Reliant International worker might owe in federal income taxes. It does not change Social Security tax obligations of employees working outside the U.S. In 2022, an eligible worker can exclude up to $112,000 of income from income tax.
This summary provides the basic requirements for claiming the foreign earned income exclusion, plus some additional information. We cover:
What income can be excluded?
The foreign earned income exclusion only excludes income earned for work performed in a foreign country. It does not matter where the employer is located, as long as the work is performed in a foreign country. “Foreign earnings” do not include earnings for work done for the mission while inside the United States for duties such as deputation or furlough, before or after the work in the foreign country.
For this exclusion, “foreign earnings” do not include earnings from a bank account or other investments, regardless of the location of the investment. If a pay period covers both time in the United States and time in a foreign country, the pay for that period is allocated based on the number of days in each location.
Tests for eligibility
There are two tests for determining whether a worker is outside the U.S. long enough to qualify. A worker in a foreign country only has to qualify under one of the tests. During a foreign stay of four years, for instance, different tests may be applied each year:
- Physical Presence: The worker was present in the foreign country for 330 full days during a continuous 12-month period.
- Bona Fide Residence: The worker established residence in a foreign country for a period that includes an entire tax year. After establishing residency with the physical presence test, that worker then is a "Bona Fide Resident" in future years.
In most cases, a foreign worker will first establish physical presence during the first year of eligibility of Foreign Earned Income. After having established physical presence, foreign workers are then considered "Bona Fide Residents." For years following, if that worker continues to live and work in a foreign location, the Bona Fide Resident definition applies in most cases. There are other qualifications for Bona Fide Residence, and a worker should consult a tax consultant if they will not meet the physical presence test in the first year.
Once Bona Fide Residence has been established using the physical presence test, a foreign worker continues to use that exclusion while working in their place of residence. That worker does not need to continue to meet the physical presence test in subsequent years.
Claiming the Exclusion
A worker must file the right form to claim the foreign earned income exclusion. Form 2555 (or Form 2555-EZ) is filed with the tax return each year in which the worker has qualifying foreign income. The information required for the form will demonstrate how the worker met one of the above requirements and the amount of income that was not taxed because of the foreign earned income exclusion. That means that the worker will report the dates that they worked outside the U.S. and the dates they worked inside the U.S. each year. The Physical Presence requirement only needs to be satisfied the first year of qualifying for foreign earned income.
Common Questions
Other Tax Considerations
Several other tax-related items beyond the scope of this article may affect some international workers:
- Some foreign countries may tax your income.
- If foreign earned income exceeds the published limit for that year, you may benefit from the foreign tax credit, foreign housing allowance, other deductions, and tax treaties. Discuss this with your tax advisor.
- Investment or other income earned in the U.S. while working in a foreign assignment will still be subject to the normal tax rules.
- Most states base taxation on residency in the state, and generally exempt income if it would qualify for the federal foreign earned income exclusion. You should consult the tax laws in your home state.
Additional Exclusion: Foreign Housing
The foreign housing exclusion essentially allows the exclusion of some overseas housing expenses that exceed a calculated threshold from income. The foreign housing exclusion is in addition to the foreign earned income exclusion. Most Reliant workers will not use this exclusion simply due to the fact that the base Foreign Earned Income Exclusion is greater already than most international salaries. When the Foreign Earned income exclusion matches or exceeds your salary, you do not need to itemize housing separately.
For the foreign housing calculation, the base household expense amount is 16% of the foreign earned income exclusion ($112,000 x 16%=$17,920 in 2022), so housing costs of less than $17,920 are not excludible. The maximum amount of the foreign housing exclusion is limited to 30% of the foreign earned income amount ($112,000 x 30%= $33,600).
- For 2022, housing costs in excess of $17,920 but less than $33,600 can be excluded in addition to the foreign earned income exclusion.
- A worker whose taxable compensation is less than $112,000 already has all of his or her income excluded by the foreign earned income exclusion.
- A worker who has taxable compensation of more than $112,000 but housing costs of less than $17,920 does not have sufficient housing costs to claim an additional exclusion for housing cost.
- A worker whose housing is excluded by the minister’s housing allowance already excludes housing costs from income. (There is no minimum threshold.)
- A worker who is required to reside on the mission’s business premises in order to perform their job (house parent at a mission school, for instance) already has the value of their housing excluded from income.
- A worker whose taxable compensation is more than $112,000, who does not qualify for minister’s housing allowance, and whose housing costs exceed $17,920, may claim an additional exclusion for housing (please consult your tax advisor for specifics).
Additional Resources
The following resources are available from the IRS website at www.irs.gov:
- IRS Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad
- https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion-bona-fide-residence-test
- Forms 2555 and 2555 EZ, Foreign Earned Income and their instructions
- Form 673, Statement For Claiming Benefits Provided by Section 911 of the Internal Revenue Cod
- http://www.irs.gov/Individuals/International-Taxpayers/Foreign-Earned-Income-Exclusion
Who can I talk to for help with tax decisions?
Reliant can not make recommendations about tax decisions, so it is the empmloyee's responsibility to seek that input from a financial advisor or tax specialist.
Below is a tax specialist that the Reliant International Team has vetted for experience and accuracy with International Tax matters:
Name | Title/Specialty | Contact Info | Notes |
---|---|---|---|
Rick Wacek | Wacek and Associates Specializing in Expat Tax Preparation | email: rick@wacekcpa.com website: https://wacekcpa.com/ | Wacek and Associates offers one free introductory consultation to any international worker who is getting ready to launch overseas. |
Krystal Rose | Village Tax Services Clergy & Overseas Tax Specialist | phone: 407-385-0267 email: info@missionarytax.com website: www.missionarytax.com | Village Tax Service offers a free 30min introductory consultation for all international workers before they launch overseas. Reliant will cover any additional cost up to 1 hour. |
23 Comments
Unknown User (julied)
Dave Meldrum-Green, I've posted the memo and it's contents here, and have linked this page to the FAQ's for International Staff. I'll come back later and make this formatting look prettier. If you ever get updates on this info in the future, you can update the info here. Thanks!
Dave Meldrum-Green
Thanks Julie!
Dave Meldrum-Green
Sarah Swann and Unknown User (ed.courtney@reliant.org) This layout needs to be cleaned up.
Sarah Swann
i fixed it to now just show the larger points. (heading 3)
Barb Seckler
user-a88de the 2018 limit is $104,100 - I added that within the first section but there are a number of examples using the 2017 rate that need to be updated (recalculated with 2018 limit) - could you handle that and republish? Thanks! FYI user-1a794
user-1a794
Barb Seckler and user-a88de - I updated language here in light of recent tax questions. This page and Finance FAQ's are now quite similar.
user-1a794
user-a88de - please bring an excerpt from the FAQ page with Vilage Tax info.
Barb Seckler
user-a88de - the 2018 rate was changed to 103,900 (I just saw this in an updated email from Capin Crouse yesterday) - I just edited this page and changed the formulas to update them accordingly. I will mark the page reviewed.
Barb Seckler
user-a88de can you change the notes here to 2019 and $105,900
Barb Seckler
user-075f6 can you change this from the 2019 rate $105,900 to the 2020 rate $107,600 please throughout this page and publish?
Barb Seckler
user-075f6 can you change this to the $108,700 2021 rate please and re-publish?
user-075f6
Barb Seckler I updated this to the 2021 rate at the top and published. I didn't touch the foreign housing exclusion yet. Does it follow suit, and I can just calculate out the breakdown based on the $108,700 rate?
Barb Seckler
the 16% stands user-075f6so can you please update that paragraph's numbers based on the 2021 rate please?
user-075f6
Barb Seckler dates and rates updated throughout
user-1a794
Barb Seckler Thanks for catching old information. FYI, I 'm guiding Bethany to make pages on solomon as timeless as possible. Obviously, we need to update new rates. Ultimatlely. I would prefer we find a way to use a hyperlink to direct people to that information, since we are not the source of it. In principle, as much as we can function like that hte better.
Barb Seckler
Good thought user-1a794 unfortunately the "source" website link of this info does change (the IRS publishes it on various pages) so I'm not sure I can tell you "the permanent link" for this that would refresh each year but, I agree whenever we can that is a good way to direct people to the right info.
Dave Meldrum-Green
Barb Seckler user-1a794 I updated the contact info from Loren Gill to Krystal Rose. Krystal told me that she is now focusing on the individual missionary tax services while Loren is more focused on serving 501c3 organizations.
Barb Seckler
user-0ef9acan you work with user-075f6and Julie Thompsonas needed to update this page for 2022 examples and text using the new 2022 limit $112,000?
Barb Seckler
also user-0ef9athis page references a different tax person that we reference on the International Finance FAQs page. I will take this and update that page.
user-0ef9a
Barb Seckler Yes, we will update this page for 2022. Just for reference, Krystal is the one who has been my contact person at village tax services, so it makes sense to use her as the reference.
user-0ef9a
Barb Seckler This page has been updated with the new 2022 limit of $112,000.
Julie Thompson
Barb Seckler - We are reformatting this page and re-worded some questions, but didn't make any changes to the information given.
Barb Seckler
Looks good - you'll want to make sure you change the work flow to "Reviewed" and then have the Space Designer "Publish" it when you're ready but it looks great Julie Thompson