Tax Rules for Americans Working Abroad

by Gregory Hamel

Many Americans choose to live and work abroad for a variety of reasons such a desire to experience other cultures or better job opportunities in other countries. Americans who work abroad are subject to a variety of special tax rules. The tax rules for working abroad should be considered when making financial plans about working abroad.

Income Taxes While Abroad

Even if you work abroad, you are still subject to US income taxes. According to the IRS, "your worldwide income is subject to U.S. income tax, regardless of where you reside." In many cases this will mean you pay taxes to both the US and a foreign nation.

Filing Date

Americans working abroad are granted a two month extension to file a tax return. This means workers must file by June 15 of the year following a given tax year. The IRS states that "any tax due must be paid by the original return due date (April 15) to avoid interest charges." If you expect to owe the IRS taxes, they should be submitted before April 15th to avoid penalties.

Foreign Earned Income Exclusion

Workers who work in foreign countries and are paid by foreign companies or governments, may be eligible for foreign earned income exclusion. When you work abroad, your income may be taxed by the government of the foreign country you work in as well as the IRS. The foreign earned income exclusion can allow workers who are long term residents of foreign nations to avoid some or all of the income tax they owe to the IRS. The IRS states that "you may be able to exclude up to $91,500 of your foreign earned income in 2010." To be eligible for the exclusion, you must have lived in the foreign country for at least 330 days of the year or be a bona fide resident of the foreign country.

Calculating Income

The IRS states that the amount of income you report to the IRS on your tax return must be expressed in terms of US dollars. Foreign workers are often paid in local currency instead of US dollars which means a calculation must be made to convert total income from local currency to dollars. The IRS says that you can use the average annual exchange rate to convert local currency to US dollars for tax purposes; you can also use the exchange rates on specific days if you made foreign transactions on certain days and kept a record of the transactions.

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