The U.S. citizen and permanent legal resident has the unusual distinction of being one of the only persons on this planet that is taxed on any foreign earned income no matter where she may have earned it. In fact, legend has it that the first person to greet alien abductees in update New York upon their return to the Earth was an IRS agent, wanting to know what they had received “anything of value or that felt good” during their abduction and reminding them to include it on their returns. ps5 for sale
While the IRS may be led and staffed by life-force sucking Dementors straight out of H… Harry Potter, they do have a practical side and realize the limits of their influence and of the difficulty of getting someone to actually declare the income they have earned abroad. Therefore, with Congressional support, an exclusion for foreign earned income of potentially $91,500 plus a housing allowance is available for the smaller fish, letting the IRS focus on the larger fish. And focus they have, increasingly tightening the screws with greater reporting requirements and a less generous exclusion for those who go over the limits.
What is earned income, and how do I know if it is “foreign?”
Earned income basically means that you traded your time and talents for compensation. That compensation could be in the form of wages, commissions, tips, professional fees, or bonuses. For it to be foreign you have to have made your “tax home” in a foreign country and have to be either a bona fide residence or physical presence test. If you meet the tests, then you are allowed to exclude from income for your tax return of up to $91,500 (in 2010) and some housing allowances. This gets tricky, and I have already covered it in depth in my article on Form 2555. What is emphatically not the case is that just because you happened to be outside the United States when you earned or were paid income does not mean it can be excluded.
You absolutely ARE required to file
Where you may be located geographically has absolutely no bearing on whether are not you are required to file nor does it matter where you earned your income; you must declare it for U.S. taxes. Usually, you will file a Form 1040 and will have any number of supplementary forms or schedules depending upon the nature of your income. For the purpose of income earned from a trade or business while living overseas the proper form is Form 2555. In addition, if you pay taxes to a foreign government then you would report them on Form 1116 to get a credit on your U.S. tax return for foreign taxes paid.
