Academic journal article Journal of Accountancy

New Rules for Individuals Working Abroad: Changes to Income and Housing Exclusions

Academic journal article Journal of Accountancy

New Rules for Individuals Working Abroad: Changes to Income and Housing Exclusions

Article excerpt

In general, U.S. citizens are subject to federal income tax on all their income, wherever earned. U.S. citizens or residents living abroad have been allowed to exclude certain foreign earned income and housing costs from taxable income, regardless of whether any foreign tax is paid on these amounts, under IRC section 911. The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) made significant changes to some of these rules; CPAs need to become familiar with these modifications.

FOREIGN EARNED INCOME

Qualified individuals. To qualify for the earned income exclusion, an individual must have a tax home (that is, "the general area of a main place of business, employment or post of duty" regardless of the location of the family home) in a foreign country and must be (1) a U.S. citizen who is a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year or (2) a U.S. citizen or resident present in a foreign country for at least 330 full days in any 12-consecutive-month period.

Determination of income. Foreign earned income is received from sources within a foreign country attributable to services performed during a period of bona fide residency or physical presence. It includes wages, salaries, professional fees and other compensation for personal services; noncash compensation must be reported at fair market value. It does not include interest or payments that represent a distribution of earnings and profits.

Limit on exclusion. Previously, the most an individual could exclude from income was $80,000. The TIPRA indexes this amount for inflation; thus, for 2006, the maximum exclusion is $82,400. …

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