U.S. citizen, resident aliens and others who are U.S. taxpayers face a unique mode of taxation in the United States. That is, U.S. taxpayers are taxed on their worldwide income regardless of where it was earned. Predictably and understandably, this method of taxation results in many expatriates worrying about whether they will face double taxation – paying taxes on their income to both the nation they are living in and to the IRS. While there are provisions in the U.S. Tax Code, and various tax treaties to address the issue of double-taxation, these provisions can be difficult to understand, create problems for laypersons in ascertaining whether he or she qualifies, and it can present difficulties in maintaining compliance in future tax years as circumstances and finances change. However, the foreign earned income exclusion can be an essential tool in ensuring that an expatriate taxpayer does not face double-taxation and pay more than his or her fair share.
What is the foreign income exclusion?
The foreign earned income exclusion is one way the Tax Code accounts for the problems created by our status-based system of taxation. In general, U.S citizens or permanent legal residents living abroad are eligible to claim the exclusion. The amount of the exclusion is adjusted each year based on the rate of inflation. The amount of the exclusion for current and past tax years is as follows: