Alternative Minimum Tax exemption amounts, Social Security wage base increase in 2020
Tax penalties in 2020 bumped up by inflation

Inflation and housing adjustments help with taxes that Americans abroad face


Welcome to Part 8 of the ol' blog's 2020 series on tax inflation adjustments. 
We started on Nov. 6 with a look at next year's income tax brackets and rates.
Today we look at considerations of U.S. taxpayers living and working abroad.
Note: The 2020 figures in this post apply to 2020 returns to be filed in 2021.
For comparison purposes, you'll also find 2019 amounts to be used
in filing 2019 returns due April 15, 2020.


Top expatriate destinations 2019_InterNations
Where's the best place for the world's millions of expatriates? InterNation's latest annual Expat Insider Survey says it's Taiwan. Regardless of where they go globally, U.S. residents who move abroad for work or to follow a dream still have to deal with the Internal Revenue Service.

People definitely are peripatetic. Millions of us move every year, crossing national borders to set up new homes.

Sometimes it's to fulfill a lifelong dream. Other times it's a work opportunity.

For most, leaving behind a home country is worth it.

Many Americans who go abroad, however, find there's one U.S. institution they can't escape: the Internal Revenue Service.

When it comes to individual taxpayers, Uncle Sam still relies on a worldwide tax system. That means the IRS 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. And they also are affected by inflation.

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.

Since inflation is a global phenomenon, it's only fitting that this U.S. tax exclusion amount is adjusted annually for inflation.

For the 2020 tax year, it's $107,600. That's $1,700 more than the 2019 exclusion amount of $105,900.

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.

But since we're are talking about the Internal Revenue Code, 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 a la Elvis' Graceland (Thank you, thank you very much), Donald J. Trump's gold-plated Manhattan apartment (which could soon be on the market as he transitions to full-time Florida Man) or the South Florida waterfront mansion pictured below, the excessive costs won't pass the tax man's muster.

South Florida waterfront mansion foyer_Concierge Auctions
Nestled between the Atlantic Ocean and the Intracoastal Waterway, the entry into this Playa Vista Isle home features a 12-foot-high, 22-karat gold door and double staircase made of South African marble. (Image courtesy Concierge Auctions)

But even more plebian accommodations 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 2020, that's $32,280 ($107,600 x 30%). The 2019 housing exclusion is $31,770 ($105,900 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 2020 amount is $17,261 (107,600 x 16%). The 2019 amount is $16,944 (105,900 x 16%).

When all the multiplying and subtraction is done, the final 2020 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 taking —

 

$32,280

($107,600 x 30%) ceiling

-

$17,261

($107,600 x 16%) base

=

$15,019

final foreign housing tax break

That's a $193 increase over the 2019 housing exclusion amount calculated below:

 

$31,770

($105,900 x 30%) ceiling

-

$16,944 

($105,900 x 16%) base

=

$14,826

final foreign housing tax break

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.

The IRS follows this list and, based on the housing data, allows U.S. taxpayers in those designated locales a potentially larger housing exclusion.

For example, a U.S. worker who for all of 2019 rents a home in expat-favored Taiwan, specifically in Taipei, which per the State Department has a 15 percent higher cost of living, can exclude from income the difference between $46,188 (the IRS announced limitation for that Asian nation's capital) and this year's $17,261 base housing amount, or $28,927 in housing costs.

That's a very nice jump from the basic $15,019 housing exclusion allowed U.S. taxpayers working this year in locales with less costly housing.

We won't know the 2020 higher-priced residential areas until spring of next year when State and the IRS release those figures.

More foreign tax info: Whatever reason you're headed abroad, enjoy soaking up another country's culture (and great food!). 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.

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 2019 tax year.

The IRS also has special pages with details on the foreign earned income exclusion. That page is a bit slow (OK, more than a bit since the latest inflation adjustments shown are for 2015), 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.

There's also the IRS page with more on the foreign housing exclusion or deduction , online page for U.S. taxpayers living abroad and the always poplar FAQs about international individual tax matters.

Finally, you also might find these blog posts about global taxes of interest:

Bon voyage and c'est la taxes!

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