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Question for the Money Doctors

Question submitted on Aug 1, 2012.

Question

I work overseas as a contractor. I am eligible for a tax exclusion. My question is: Why do contractors working overseas have this benefit? What is the reasoning behind it?
Thank you for your help

Answer

As a U.S. citizen, you are taxed on your worldwide income.  However, all US citizens living abroad may qualify to exclude up to $92,900 of foreign earnings from US taxable income to partially offset the burden of double income taxation by both the United States and the resident foreign country.

To claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, you must meet all three of the following requirements:

  1. Your tax home must be in a foreign country.
  2. You must have foreign earned income.
  3. You must be one of the following.
    1. A U.S. citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year.
    2. A U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year.
    3. A U.S. citizen or a U.S. resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.

IRS Publication 54 discusses several tax provisions that mitigate your double taxation, such as:

  • Foreign earned income exclusion
  • Foreign housing exclusion and deduction
  • Foreign moving expenses
  • Foreign taxes
  • Tax treaty benefits

That being said, please note that the income tax rules applicable to expatriates are very complex and that you would be well served by contacting a CPA/PFS who will be able to help you.  Please visit www.findacpapfs.com to find a CPA/PFS in your area.


For additional information visit http://www.360financialliteracy.org/