Foreign Income: Exclusions and Tax Credits

Today's tax question comes from three readers who asked how the IRS taxes income earned while working overseas.

US Citizens and resident aliens are taxed on their worldwide income. However, if you live and work in a foreign country, you can take advantage of the foreign earned income exclusion and the foreign tax credit.

Under the foreign earned income exclusion, you can exclude up to $80,000 per year from federal income taxes. You need to meet one of two residency tests in order to qualify.

With the foreign tax credit, you can get a dollar for dollar tax credit in the US for taxes paid to foreign countries. You cannot take a foreign tax credit on wages you choose to exclude under the foreign earned income exclusion.

If you live and work abroad for any length of time, you will probably be opening a foreign bank account. You will need to fill out a separate foreign bank account report for the US Treasury Department. This report is not filed with your tax return, and the deadline for filing the report is June 30th.

Throughout the tax season I will be answering one tax question per day. Do you have a question? Visit the Ask a Tax Question page. Disagree with my answers? Post your comments in the Tax Forum.