Tax Tips For Americans Who Earned Income Abroad In 2022
If you're an American tax filer who earned income abroad in 2022, there are a few things you'll need to know when reporting that income on your taxes.
Regardless of your circumstances, this blog post can help you understand what you need to know about your taxes and how they relate to your income abroad.
How is income earned abroad taxed?
As an American citizen, you must report and pay taxes on all income earned worldwide, regardless of where it was earned. This includes wages, salaries, and tips earned as an employee, as well as self-employment income, business income, and rental income. However, you can take advantage of the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC) to reduce or eliminate the U.S. taxes you owe on your foreign income.
The FEIE allows you to exclude up to a certain amount of your foreign-earned income from U.S. taxes. For the 2022 tax year, the FEIE is $112,000. To qualify for the FEIE, you must meet either the Physical Presence Test or the Bona Fide Residence Test.
The Physical Presence Test requires you to be physically present in a foreign country or countries for at least 330 full days during 12 months. The Bona Fide Residence Test requires you to be a resident of a foreign country or countries for an uninterrupted period that includes an entire tax year.
If you do not qualify for the FEIE or your foreign income exceeds the exclusion amount, you may still be able to claim the FTC. The FTC allows you to claim a credit for any foreign taxes you paid on your foreign income, effectively reducing your U.S. tax liability by the amount of the foreign taxes paid.
It's important to note that if you claim the FEIE, you cannot also claim the FTC for the same income. Therefore, it's important to determine which option will provide the more significant tax benefit for you.
You must file Form 1116 and your federal income tax return to claim the FTC. This form will require you to provide information about the foreign taxes you paid and your foreign income and exclusion.
What counts as earning income abroad?
Many different types of Americans may earn income abroad. Some examples include:
- Military personnel who are stationed overseas and earn a salary while serving abroad.
- Business executives who travel internationally for work and earn a salary or commission while abroad.
- Self-employed individuals such as consultants, freelancers, or entrepreneurs who earn income from foreign clients or customers.
- Expatriates, or American citizens living and working abroad in a foreign country for an extended period.
- Students, scholars, or researchers who study or conduct research abroad and earn stipends or research grants.
- Digital nomads who travel and work remotely, earning income through online platforms or businesses.
- Tourists or travelers who are working abroad on a short-term basis, like temporary jobs or contract basis
- Missionaries, who may earn income while serving abroad in their religious or humanitarian roles.
It's important to note that any American citizen who earns income abroad will be required to report that income and pay taxes on it to the IRS, regardless of their occupation or time spent abroad.
What are credits and deductions for Americans who earned income abroad?
In addition to the FEIE and FTC, there are a few other credits and deductions you may be able to claim if you earned income abroad.
- The Housing Exclusion or Deduction allows you to exclude or deduct a certain amount of your foreign housing expenses from your foreign-earned income. The amount of the exclusion or deduction depends on the cost of living in your host country and your foreign-earned income.
- The Foreign Housing Credit allows you to claim a credit for a portion of your foreign housing expenses. To claim the credit, you must file Form 2555 and Form 1116 along with your federal income tax return.
- The Moving Expense Deduction allows you to deduct certain moving expenses related to your move overseas. This includes expenses such as transportation and storage of household goods, travel expenses, and lodging expenses. You must file Form 3903 and your federal income tax return to claim the moving expense deduction.
- Child Tax Credit: If you have dependent children and are eligible, you may claim the Child Tax Credit, which will help offset the cost of raising children.
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