Taxation of U.S. Citizens Working in a Foreign Country

Taxation of U.S. Citizens Working in a Foreign Country

Taxpayers must report all income from wherever it is earned. However, taxpayers who are working abroad are subject to double taxation. The income they earn in a foreign country is subject to taxation in that country, as well as on their U. S. tax returns. In examining the taxation of U.S. citizens or residents living abroad, Professor Philip Fink discusses mitigating this double tax burden by excluding a certain amount of this income from U. S. gross income. He writes:
 
Citizens or residents of the U.S. who work in a foreign country can elect to either exclude their foreign earned income or take a foreign tax credit against the amount of income taxes that they owe to the U.S. IRC Sections 911(a), (b) and (d) lay out the rules for determining how much of an individuals foreign earned income can be excluded from his or her gross income. In general, taxpayers must report all income from wherever earned. However, taxpayers who are working abroad are subject to a double taxation. That is, the income they earn in a foreign country is subject to taxation in that country as well as on their U. S. tax returns. In an attempt to mitigate this double tax burden, these subsections allow individuals with foreign earned income to exclude a certain amount of this income from their U. S. gross income.
 
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 Individuals who work in a foreign country may come back to the U.S. for holidays and other occasions to be with their friends and family. It should be noted that the 330 days do not have to be consecutive days, but the 330 days do have to occur in a 12 month consecutive period. Individuals who go back and forth to a foreign country, may use the time from a prior trip in a foreign country to qualify for the exclusion in a subsequent trip.
 
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The exclusion is limited to $87,600 per person in 2008 ($85,700 in 2007). If married individuals file a joint return, and each spouse has foreign earned income, both are entitled to the exclusion up to the applicable amount for the year in question. Since this amount is indexed, it will vary from year-to-year. If all the days in a tax year are not spent in a foreign country, then the taxpayer must compute the maximum exclusion on a daily basis. This is done in three steps. First, divide $87,600 by the number of days in the entire year. Second, this amount is then multiplied by the number of days that an individual spent in a foreign country. Then, subtract the amount calculated in the second step from the individuals foreign earned income.