Taxation Of Foreign Individuals And Us Citizens In Foreign Countries

<div class="Section1"><br /> <br /> The estate tax computation base of a nonresident alien&rsquo;s estate consists of his or her taxable estate plus any taxable gifts made during his or her lifetime.<a href="#_ftn1" name="_ftnref1">¹</a> The taxable gifts of a nonresident alien made after 1976 (other than gifts included in the gross estate) also form part of the tax base upon which the estate tax is computed. The adjusted taxable gifts of a nonresident alien are computed in the same manner as for a resident citizen.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> Once the taxable estate of the nonresident alien decedent is determined, the mechanics of the actual tax calculation and the applicable rate schedule (before the unified credit) are the same for nonresident alien decedents as for citizen-residents. However, a very important difference comes into play in the use of the unified credit, which is greatly reduced for nonresident alien decedents. This, of course, indirectly results in a higher effective tax rate. <em><em>See</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="964">964</a> for a discussion of the unified credit as applied to nonresident aliens.<br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect;&nbsp;2101(c).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect;&nbsp;2101(b), (c).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> The unified transfer tax credit in the case of a nonresident alien decedent is only $13,000.<a href="#_ftn1" name="_ftnref1">¹</a> This effectively exempts only the first $60,000 of his or her taxable estate from estate tax, a considerably lower threshold than applies to a domestic decedent.<br /> <br /> A special rule applies if the decedent was a nonresident of the United States, but resided in a U.S. possession (e.g., Puerto Rico, Guam) and was a U.S. citizen only because of birth or residence in, or citizenship of, the possession. Under these circumstances, the decedent is considered to be a “nonresident noncitizen,”<a href="#_ftn2" name="_ftnref2">²</a> and the estate of a decedent in this category qualifies for a credit that is the greater of:<br /> <blockquote>(1)     $13,000, or<br /> <br /> (2)     $46,800 multiplied by the ratio that the value (at death) of that part of the decedent’s gross estate that is located in the U.S. bears to the entire value of the decedent’s gross estate.<a href="#_ftn3" name="_ftnref3">³</a></blockquote><br /> In either case, the credit may not be more than the amount of the estate tax.<a href="#_ftn4" name="_ftnref4">⁴</a> Further, the amount of the available credit is reduced by the value of any lifetime gifts made by the nonresident alien-decedent.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>     IRC § 2102(b)(1).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>     IRC § 2209.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>     IRC § 2102(b)(2).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>     IRC § 2102(b)(4).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>     IRC § 2102(b)(3)(B).<br /> <br /> </div>

<div class="Section1"><br /> <br /> A U.S. individual with foreign earned income must satisfy either the bona fide residence test or the physical presence test in order to be eligible to exclude all or a portion of foreign earned income from U.S. income.<br /> <p style="padding-left: 40px;"><em>Editor’s Note:</em> The IRS relaxed these requirements for 2020 in response to travel restrictions put in place in response to COVID-19. An otherwise qualified individual could still exclude foreign earned income for the period in which the individual was actually present in the foreign country, even if the individual fails to meet the time requirements. To qualify for relief, an individual must establish (1) he or she must have established residency, or have been physically present in either China on or before December 1, 2019, or any other foreign country on or before February 1, 2020; (2) the individual must have departed either China (excluding Hong Kong and Macau) between December 1, 2019, and July 15, 2020, or any other foreign country between February 1, 2020, and July 15, 2020; and (3) individual would have met the requirements of either the bona fide residence test or the physical presence test, but for the COVID-19 emergency.<a href="#_ftn1" name="_ftnref1">¹</a></p><br /> An individual may use the “bona fide residence test” to qualify for the exclusion if the individual is either (a) a U.S. citizen or (b) a U.S. resident alien who is a citizen of a country with which the U.S. has an income tax treaty in effect. The bona fide residence test, as the name suggests, is met if the individual has established a residence in a foreign country. The length of the individual’s stay and the nature of employment are factors considered in determining whether the individual has established a residence in a foreign country, but are not determinative—all of the facts and circumstances of the particular situation must be taken into account.<br /> <br /> The IRS has provided bright-line guidance so that the individual must reside in the foreign country for an uninterrupted period that includes an entire tax year, though every individual that resides in a foreign country for at least an entire tax period is <em>not</em> automatically considered to have established a residence.<a href="#_ftn2" name="_ftnref2">²</a><br /> <p style="padding-left: 40px;"><em>Example:</em> Shannon’s domicile (permanent home) is in Brooklyn, New York, but she is assigned to her employer’s London office for an indefinite duration. She rents an apartment in London with a one-year lease, though she intends to eventually return to Brooklyn. Assuming all other factors indicate that Shannon has established a residence in London, she will meet the bona fide residence test even though she plans to return to Brooklyn at some point in the future. If Shannon had, for example, been sent to London for a month-long work assignment with a definite return date, she would not be able to satisfy the bona fide residence test. If Shannon had been assigned to her work post in London for 16 months, she may not be able to meet the bona fide residence test because her presence in London is limited in duration.</p><br /> An individual (whether a U.S. citizen or resident alien) meets the physical presence test if physically present in a foreign country (or countries) for at least 330 days during a consecutive 12-month period. The individual is not required to establish a residence and there are no requirements as to whether or not the individual intends to return to the U.S. at a specified time under the physical presence test. Unlike the tax home requirement, the individual can be in the foreign country during these days for any reason—there is no requirement that the presence abroad be motivated by business or employment reasons.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>     Rev. Proc. 2020-27.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>     See IRS Guidance: “Foreign Earned Income Exclusion – Bona Fide Residence Test,” available at https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion-bona-fide-residence-test (last accessed June 17, 2024).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>     See IRS Guidance: “Foreign Earned Income Exclusion – Physical Presence Test,” available at https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion-physical-presence-test (last accessed June 17, 2024).<br /> <br /> </div>

U.S. individuals residing abroad may become subject to both the FBAR and FACTA reporting rules, and the corresponding penalties for noncompliance, based upon their participation in foreign retirement plans.<br /> <br /> Generally, a U.S. individual who has an interest in any “foreign account” is required to file an FBAR (Form TD F90-22.1) if the aggregate value of foreign accounts exceeds $10,000 at any time during the calendar year.<a href="#_ftn1" name="_ftnref1">¹</a> The IRS has issued regulations that specifically exempt certain accounts, including plans that qualify under IRC Section 401 and IRA accounts, but these regulations do not provide a similar exemption for <em>foreign</em> retirement accounts.<a href="#_ftn2" name="_ftnref2">²</a> Therefore, whether FBAR reporting will be required for a U.S. individual’s foreign retirement accounts will likely turn upon whether the individual has a “financial interest” or “signature authority” over the foreign account.<br /> <br /> Penalties for failure to file an FBAR can be steep—for willful violations, the civil penalty can equal the greater of $100,000 or 50 percent of the account assets, and the IRS may be entitled to file criminal charges.<a href="#_ftn3" name="_ftnref3">³</a> For non-willful violations, the penalty can still equal up to $10,000 per violation unless the taxpayer can show that there was reasonable cause for failure to file, in which case no penalty is imposed.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> Because of the steep penalties imposed upon taxpayers who do not comply with FBAR reporting obligations, the IRS has issued guidance to allow certain “low risk” nonresident U.S. taxpayers who have resided outside of the U.S. since January 1, 2009 to catch up on filing delinquent U.S. income tax returns and FBARs with respect to their foreign accounts. Whether an individual is “low risk” or not will be determined based on the amount of U.S. income tax owed (less than $1,500 per tax year is low risk), and these delinquent returns will be processed in a streamlined manner absent any other high risk factors.<a href="#_ftn5" name="_ftnref5">⁵</a> The plan is described by the IRS as a method to provide assistance to U.S. citizens residing abroad, including dual citizens, with foreign retirement plan issues.<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> In addition to FBAR filing requirements, a U.S. individual may be required to comply with FATCA and report any foreign financial assets with an aggregate value of over $50,000 (or higher amount, if the Secretary otherwise provides) on Form 8938, Statement of Specified Foreign Financial Assets, attached to his or her U.S. tax return.<a href="#_ftn7" name="_ftnref7">⁷</a><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>     <em><em>See</em> </em>IRS “FAQs Regarding Report of Foreign Bank and Financial Accounts (FBAR) – Financial Accounts,” available at https://www.irs.gov/businesses/small-businesses-self-employed/report-of-foreign-bank-and-financial-accounts-fbar (last accessed June 17, 2024).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>     <em><em>See</em> </em>IRS Guidance: “Report of Foreign Bank and Financial Accounts (FBAR),” available at https://www.irs.gov/businesses/small-businesses-self-employed/report-of-foreign-bank-and-financial-accounts-fbar (last accessed June 17, 2024).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>     31 USC § 5321(a)(5).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>     <em><em>See</em> </em>IRS FS-2011-13 (Dec. 2011).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>     <em><em>See</em></em> IRS Instructions for New Streamlined Filing Compliance Procedures for Nonresident, Non-Filer U.S. Taxpayers, available at http://www.irs.gov/Businesses/Corporations/Summary-of-FATCA-Reporting-for-US-Taxpayers (last accessed June 17, 2024).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>     IR-2012-65 (June 26, 2012).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>     IRC § 6038D(a).

In some cases, a U.S. individual will continue to earn U.S. Social Security credit if liable for Social Security and Medicare taxes on amounts earned while performing services as an employee in a foreign country. The IRS has issued guidance that provides that Social Security and Medicare taxes continue to apply to wages paid for services performed by a U.S. individual abroad if any of the following are true:<br /> <p style="padding-left: 40px;">(1)     The individual is working for a U.S. employer,</p><br /> <p style="padding-left: 40px;">(2)     The individual performs services in connection with a U.S. aircraft or vessel and the individual has (a) entered into an employment contract in the U.S. or (b) the vessel or aircraft touches down at a U.S. port while the individual is employed on it,</p><br /> <p style="padding-left: 40px;">(3)     The individual is working in a country with which the U.S. has entered a Social Security agreement providing that the foreign earned income is subject to U.S. Social Security and Medicare taxes, or</p><br /> <p style="padding-left: 40px;">(4)     The individual is working for a foreign affiliate (a foreign entity in which the U.S. employer has at least a 10 percent interest) of a U.S. employer under a voluntary agreement (under IRC Section 3121(l)) entered into by that employer and the U.S. Treasury Department.<a href="#_ftn1" name="_ftnref1">¹</a></p><br /> The IRS guidance further provides that an individual is “working for a U.S. employer” for purposes of (1), above, if the individual is working for (a) the U.S. government (or instrumentality thereof), (b) another individual who is a U.S. resident, (c) a partnership in which at least two-thirds of the partners are U.S. residents, (d) a trust, in which all of the trustees are U.S. residents or (e) a corporation organized in the U.S., or in any U.S. state (including D.C., the Virgin Islands, Guam, American Samoa and the Northern Mariana Islands).<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> A U.S. employer who voluntarily enters into an agreement to extend Social Security coverage to its employees working in a foreign country is liable for the entire amount of the covered employees’ Social Security taxes that would otherwise apply under Sections 3101 and 3111 if those employees were employed domestically.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> The IRS has advised that U.S. individuals who are working in a country with which the U.S. has entered a Social Security agreement providing that the individual’s income will <em>not</em> be subject to U.S. Social Security taxes obtain a statement from the relevant agency in the foreign country stating that the individual’s income is subject to Social Security coverage in that foreign country.<br /> <br /> The U.S. Social Security Administration (SSA) will issue determinations that a U.S. individual’s income is subject only to U.S. Social Security taxes if the employer contacts the SSA and provides certain basic identifying information about that individual and his or her employment abroad.<br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>     See IRS Guidance: “Social Security Tax Consequences of Working Abroad,” available at http://www.irs.gov/Individuals/International-Taxpayers/Social-Security-Tax-Consequences-of-Working-Abroad (last accessed June 17, 2024).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>     IRC § 3121(h).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>     IRC § 3121(l)(1)(A).

<div class="Section1"><br /> <br /> The general rule that a U.S. citizen or resident alien is taxed on all worldwide income applies in the case of a sale of real property in the same manner as income from any other source.<a href="#_ftn1" name="_ftnref1">¹</a> Therefore, a U.S. citizen or resident alien who sells real property that is located in a foreign country must report and abide by U.S. tax rules relating to the sale of real property (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7845">7845</a>).<br /> <br /> Thus, for example, a U.S. citizen who sells a principal residence that he or she has used as a principal residence for two of the five preceding tax years is entitled to exclude a portion of the gain from taxation in the U.S. in the same manner as though the property was located within the U.S. (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7845">7845</a>).<br /> <br /> Though the U.S. citizen or resident alien may also be required to pay taxes upon disposition of foreign-located real property both in the U.S. and in the country in which the property is situated, he or she will be entitled to claim a credit for certain foreign taxes paid on his or her U.S. tax return.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> Further, a U.S. citizen or resident alien may be entitled to deduct any real property taxes that are imposed by a foreign country on his or her U.S. tax return.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>&nbsp;&nbsp;&nbsp;&nbsp; See IRS Publication 544.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>&nbsp;&nbsp;&nbsp;&nbsp; See IRS Publication 54.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>&nbsp;&nbsp;&nbsp;&nbsp; IRS Pub. 54.<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> A foreign individual who is not a U.S. citizen is labeled as an “alien” for U.S. tax purposes. An alien is either a nonresident alien or a resident alien. A resident alien is a foreign individual who meets either the green card test or the substantial presence test, discussed below, and a nonresident alien is any other foreign individual unless that individual is otherwise eligible to elect to be treated as a resident alien.<br /> <br /> A foreign individual meets the “green card test” if given permission to reside in the U.S. on a permanent basis by U.S. Citizenship and Immigration Services (or a predecessor) and such permission has not been revoked or judicially determined to have been abandoned by the individual.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> A foreign individual meets the “substantial presence test” if physically present in the U.S. for at least (1) 31 days in 2025 and (2) 183 days during the three-year period that includes 2025, 2024 and 2023, counting only a certain number of days that the individual is present in the U.S. per year, based on the following table:<a href="#_ftn2" name="_ftnref2">²</a><br /> <table style="height: 150px;" border="1" width="390" align="center"><br /> <tbody><br /> <tr><br /> <td width="57"><strong>Year</strong></td><br /> <td width="266"><strong>Days Counted Toward 183 Day Total</strong></td><br /> </tr><br /> <tr><br /> <td width="57">2025</td><br /> <td width="266">All days present in the U.S.</td><br /> </tr><br /> <tr><br /> <td width="57">2024</td><br /> <td width="266">1/3 of days present in the U.S.</td><br /> </tr><br /> <tr><br /> <td width="57">2023</td><br /> <td width="266">1/6 of days present in the U.S.</td><br /> </tr><br /> </tbody><br /> </table><br /> In general, an individual is treated as being “physically present” in the U.S. for any day in which he or she is actually present in the U.S. at any time of the day. Despite this, an individual does not count the following as days as being physically present in the U.S.:<br /> <blockquote><br /> <p style="text-align: left;">(1)     Days that the individual commutes into the U.S. for work from a residence in Canada or Mexico if that individual regularly commutes into the U.S. for work (meaning that the individual commutes on more than 75 percent of workdays during the individual’s working period);</p><br /> <p style="text-align: left;">(2)     Days that the individual is in the U.S. for less than 24 hours while in transit between two foreign countries;</p><br /> <p style="text-align: left;">(3)     Days that the individual is in the U.S. as a member of a crew of a foreign vessel;</p><br /> <p style="text-align: left;">(4)     Days that the individual is only in the U.S. because of a medical condition that arose while in the U.S. and that rendered that individual unable to leave the U.S.; and</p><br /> <p style="text-align: left;">(5)     Days that the individual was an exempt individual (including individuals temporarily present in the U.S. as foreign-government related individuals, teachers or trainees on a “J” or “Q” visa, individuals present in the U.S. on a student visa, and certain professional athletes in the U.S. for a charitable sports event).<a href="#_ftn3" name="_ftnref3">³</a></p><br /> </blockquote><br /> A resident alien will be taxed much in the same way as a U.S. citizen, and thus will be subject to U.S. taxation on all worldwide income. Conversely, a nonresident alien will only become subject to U.S. taxation in the event that he engages in certain activities that create a connection between that individual and the United States.<br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>     See IRS Publication 519, available at <a href="http://www.irs.gov/publications/p519/index.html">http://www.irs.gov/publications/p519/index.html</a> (last accessed June 17, 2024).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>     IRS Pub. 519, <em>supra</em>.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>     IRS Pub. 519, <em>supra</em>, and IRS Guidance, “Substantial Presence Test,” available at <a href="http://www.irs.gov/Individuals/International-Taxpayers/Substantial-Presence-Test">http://www.irs.gov/Individuals/International-Taxpayers/Substantial-Presence-Test</a> (last accessed June 17, 2024).<br /> <br /> </div>

<div class="Section1">If a U.S. citizen or resident alien is married to a nonresident alien, the couple may elect to treat the nonresident alien as a U.S. resident for tax purposes. The couple may elect this treatment by attaching a statement to this effect to their U.S. tax return for the relevant tax year. The election may be made at the time of filing, or by filing an amended tax return for up to three previous tax years (though in this case, the couple must also elect such treatment for all tax returns that have been filed since the date of the amended return).</div><br /> <div></div><br /> <div class="Section1">The couple must file a joint tax return for the year in which the election is originally made, though separate returns may be filed in later years.</div><br /> <div></div><br /> <div class="Section1">While this election will result in the nonresident alien being treated as a resident alien for income tax purposes, the individual may continue to be treated as a nonresident alien for purposes of Social Security and Medicare taxes.<a href="#_ftn1" name="_ftnref1">¹</a></div><br /> <div></div><br /> <div class="Section1">The election will apply until it is suspended or ended. The election is suspended if, during a later tax year, neither spouse is a U.S. citizen or resident alien. The election is ended if (a) it is revoked by either spouse, (b) one spouse dies, (c) the spouses are legally separated or (d) the spouses have failed to keep adequate records to prove their income tax liability.<a href="#_ftn2" name="_ftnref2">²</a> If the election is “ended,” neither spouse may apply to make the election in a subsequent tax year.</div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>     IRS Guidance, “US Citizens and Resident Aliens Abroad – Nonresident Alien Spouse,” available at https://www.irs.gov/individuals/international-taxpayers/nonresident-alien-spouse (last accessed June 17, 2024).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>     IRS Pub. 519.<br /> <br /> </div>

<div class="Section1"><br /> <br /> The foreign earned income exclusion is available if the following requirements are met:<br /> <blockquote>(1)&nbsp;&nbsp;&nbsp;&nbsp; The individual has income received for work performed in a foreign country,<br /> <br /> (2)&nbsp;&nbsp;&nbsp;&nbsp; The individual has a tax home in a foreign country, and<br /> <br /> (3)&nbsp;&nbsp;&nbsp;&nbsp; The individual meets either (i) the bona fide residence test or (ii) the physical presence test (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="956">956</a>).<br /> <br /> &nbsp;</blockquote><br /> According to IRS guidance, an individual&rsquo;s &ldquo;tax home&rdquo; is the general area of the individual&rsquo;s principal place of business or employment. The individual&rsquo;s principal place of residence is irrelevant for determining the individual&rsquo;s tax home. However, if the individual is not consistently present in one business location, the location of that individual&rsquo;s principal residence may be used as a factor in the tax home determination. If the individual has neither a regular principal place of business or residence, the individual is considered itinerant and his or her tax home is wherever he or she works. The individual&rsquo;s tax home is <em>not</em> considered to be in a foreign country if that taxpayer&rsquo;s &ldquo;abode&rdquo; is in the U.S.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> <div class="Section1" style="padding-left: 40px;"><br /> <br /> <em>Example:</em> Joe is a U.S. citizen who is employed on a fishing enterprise in the waters of a foreign country. His schedule provides that he works one month on and one month off. Joe continues to maintain a residence in the U.S., where his family lives and where he returns on his &ldquo;off&rdquo; months. Joe is considered to have a &ldquo;tax home&rdquo; in the U.S. because his time is split equally between the U.S. and foreign waters. He is not entitled to take advantage of the foreign earned income exclusion, though he may be entitled to deduct his living expenses while living abroad as business travel expenses.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> A taxpayer&rsquo;s election to exclude foreign earnings under the foreign earned income exclusion may be revoked by the taxpayer by filing a statement to that effect with the IRS, but if the taxpayer attempts to claim the exclusion within five tax years after the revocation, he or she must apply for IRS approval.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>&nbsp;&nbsp;&nbsp;&nbsp; IRS Pub. 54 (2019), p.12<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>&nbsp;&nbsp;&nbsp;&nbsp; See IRS Guidance, &ldquo;Foreign Earned Income Exclusion &ndash; Tax Home in Foreign Country,&rdquo; available at https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion-tax-home-in-foreign-country (last accessed June 17, 2024).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>&nbsp;&nbsp;&nbsp;&nbsp; See IRS Guidance: &ldquo;Revocation of the Foreign Earned Income Exclusion,&rdquo; available at http://www.irs.gov/Individuals/International-Taxpayers/Revocation-of-the-Foreign-Earned-Income-Exclusion (last accessed June 17, 2024).<br /> <br /> </div></div><br />

The foreign housing exclusion applies to housing costs paid for with employer-provided funds (including amounts paid by the employer to the employee as taxable foreign earned income), while the foreign housing deduction applies to an individual who pays for foreign housing with self-employment earnings.<br /> <br /> The foreign housing exclusion (or deduction) allows an individual to exclude (or deduct) amounts spent on housing costs while residing abroad, provided that the individual’s tax home is found to be in a foreign country and the taxpayer meets either the bona fide residence test or the physical presence test.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> An individual’s “housing amount” is the total housing costs for the year <em>minus</em> a base amount that is tied to the maximum foreign earned income exclusion for the year. The amount is 16 percent of the maximum foreign earned income exclusion ($130,000 in 2025, $126,500 in 2024, $120,000 in 2023, $112,000 in 2022, $108,700 in 2021, $107,600 in 2020, $105,900 in 2019, and $103,900 in 2018, as indexed for inflation),<a href="#_ftn2" name="_ftnref2">²</a> calculated on a daily basis, and multiplied by the number of days spent abroad in the tax year.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> Housing expenses that qualify for the exclusion or deduction must be reasonable, and can also include housing expenses for the individual’s spouse and/or dependents if they live with the individual while abroad.<a href="#_ftn4" name="_ftnref4">⁴</a> The cost of purchasing real property, furniture, accessories or other improvements to increase the value of the property are excluded from the definition of housing expenses for purposes of the exclusion (or deduction). Expenses relating to housing, such as the cost of utilities and insurance, are included in the definition of housing expenses for purposes of the exclusion (or deduction).<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> The amount of a taxpayer’s foreign housing exclusion (or deduction) cannot exceed the amount of foreign-earned income for the tax year.<br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>     IRC § 911(a)(2).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>     Rev. Proc. 2018-18, Rev. Proc. 2018-57, Rev. Proc. 2019-44, Rev. Proc. 2020-45, Rev. Proc. 2021-45, Rev. Proc. 2022-38, Rev. Proc. 2023-34, Rev. Proc. 2024-40.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>     IRC § 911(c)(1).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>     IRC § 911(c)(3).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>     IRC § 911(c)(3).