Welcome to Part 8 of the ol' blog's 2019 series on tax inflation adjustments.
Today we look at considerations of U.S. taxpayers living and working abroad.
You can find links to all 2019 inflation posts
in the series' first item: income tax brackets and rates.
Note: The 2019 figures apply to 2019 returns that are due in April 2020.
For comparison purposes, you'll also find 2018 amounts to be used
in filing this year's 2018 tax return due April 15, 2019.
People definitely are peripatetic. Millions of us move every year, with around 57 million crossing national borders to new homes.
Americans who go abroad, however, face a hard tax fact. Whether they head to a new nation for work or purely personal reasons (love and adventure join career as the top three reasons for expatriation), they cannot leave the Internal Revenue Code behind.
When it comes to individual taxpayers, Uncle Sam still relies on a worldwide tax system. That means the Internal Revenue Service collects a portion of citizens' or resident aliens' incomes regardless of where in the world they earn their money.
There are, however, some tax benefits for U.S. workers abroad.
Excluding foreign-earned income: The most notable tax break is the foreign earned income exclusion, or FEIE. This allows workers abroad who meet certain requirements to legally avoid paying U.S. tax on some of their foreign wages.
The exclusion amount is adjusted annually for inflation.
For the 2019 tax year, it's $105,900. That's $2,000 more than the 2018 exclusion amount of $103,900.
Foreign workers have already noted, to their dismay, that this spring the 2018 FEIE amount was revised downward (from $104,100 in the original inflation announcement in late 2017) following the passage of the Tax Cuts and Jobs Act (TCJA). The new tax law now requires that inflation be calculated using the Chained Consumer Price Index for All Urban Consumers (CCPI-U) that tends to produce lower inflation amounts.
To claim the FEIE, you must meet all three of the following requirements:
- Your tax home must be in a foreign country.
- You must have foreign earned income.
- You must be either
- A U.S. citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year, or
- A U.S. resident alien who is a citizen or national of a country with which the U.S. has an income tax treaty in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year, or
- A U.S. citizen or a U.S. resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.
These same requirements also apply to the other major tax benefit allowed Americans working in another country, the foreign housing exclusion or deduction.
Housing tax break, too: Overseas workers also might be able to exclude (or deduct if self-employed) from gross income a certain amount of housing costs.
We are talking about the not-really-simplified-by-recent-tax-reform Internal Revenue Code, so it's not as simple as just writing off your London flat's rent. There's plenty of added math.
First, start with your residential expenses. And note that the IRS says they must be reasonable. If you decide to go lavish or extravagant, like the decorator of the South Florida mansion below, the excessive costs won't pass the tax man's muster.
More plebian accommodations, however, also have tax limits. Specifically, a housing ceiling and a base amount are used to calculate an overseas taxpayer's ultimate tax break for his or her residential costs abroad.
The IRS generally sets a ceiling of 30 percent of the annual inflation-adjusted FEIE. For 2019, that's $31,770 ($105,900 x 30%). The 2018 housing exclusion is $31,170 ($103,900 x 30%).
Then the excludable/deductible housing amount is affected by what the base housing amount, which also is a percentage of the annual FEIE amount. The exact figure is 16 percent, making the 2019 amount $16,944 (105,900 x 16%). The 2018 amount is $16,624 ($103,900 x 16%).
When all the multiplying and subtraction is done, the final 2019 computation means that the most many foreign-based workers next year can exclude housing costs from their income of only $14,826.
That amount is arrived at by —
($105,900 x 30%) ceiling
($105,900 x 16%) base
final foreign housing tax break
It is, however, up a bit from the 2018 final overseas residential tax exclusion of $14,546.
More relief in higher-rent locales: All of us HGTV House Hunters International fans know that sometimes it's hard to find the kind of residential bargain that the IRS will reward.
Not to worry. There's also tax help for U.S. citizens and resident aliens who live and work in countries with higher housing costs.
The Department of State tracks the cost-of-living worldwide and grants an allowance to employees officially stationed in a foreign area where the cost of living, exclusive of quarters costs, is substantially higher than in Washington, D.C.
For example, a U.S. worker who for all of 2018 rents a home in expat-favored Bahrain, which per the State Department has a 20 percent higher cost of living, can exclude from income the difference between $48,300 (the IRS announced limitation for that Mideast nation) and this year's $16,944 base housing amount, or $31,356 in housing costs.
That's a nice jump from the basic $14,826 housing exclusion allowed U.S. taxpayers working this year in locales with less costly housing.
We won't know the 2019 higher-priced residential areas until spring of next year when State and the IRS release those figures.
Whatever reason you're headed abroad, enjoy soaking up another country's culture. And use these tax breaks to make sure you pay the U.S. Treasury less so that you can spend those tax savings exploring your expatriate home.
More foreign tax info: You can read more about foreign tax issues in general in IRS Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad. It should be updated soon for the 2018 tax year.
The IRS also has special pages with details on the foreign earned income exclusion. That page doesn't yet reflect current inflation adjustments, but it does have a link to an interactive tool where you can see if you're able to exclude income in a foreign country.
You also might find these items of interest:
- Nationalism, globalism and worldwide tax competitiveness
- Special circumstances (like living abroad) give some taxpayers more filing time
- FBAR filing now due in April + more on foreign accounts & issues facing taxpayers abroad