Don't Mess With Taxes

Photo: JHL via Flickr

The last couple of years have been challenging for U.S. citizens living and working abroad. The COVID-19 era for expatriates has meant they've had to deal with changing demands from their American-based employers along with the health rules of the nation where they live.

One thing, however, has remained the same. Most Americans who go abroad for work still must deal with the Internal Revenue Service.

They owe U.S. taxes on their income, regardless of where it's earned, because Uncle Sam still relies on a worldwide tax system at the individual level.

There are, however, some tax provisions that can help U.S. workers abroad. And like many parts of the Internal Revenue Code, they also are affected by inflation.

Excluding foreign-earned income: The most notable tax break for U.S. taxpayers working abroad is the foreign earned income exclusion, or FEIE. This allows those who meet certain requirements to legally avoid paying U.S. tax on some of their foreign wages.

For the 2022 tax year, that earnings amount is $112,000. That's a nice bump up from 2021's FEIE of $108,700.

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 with the global version of Elvis' Graceland, the IRS will say "thank you, thank you very much, but no tax break" for excessive housing costs.

Downton Abbey clones likely won't pass the IRS' foreign housing exclusion. (Image of Highclere Castle via Wikipedia Commons)

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 2022, that will be $33,600 ($112,000 x 30%). The 2021 housing exclusion is $32,610 ($108,700 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 2022 amount $17,920 ($112,000 x 16%). The 2021 amount $17,392 ($108,700 x 16%). 

To use the exclusion, your qualifying housing costs must exceed the applicable tax year’s base 16 percent amount, or to use realty speak, the expense floor. When they do, you can exclude (or deduct) the total of your qualifying expenses up to the maximum amount allowed for the tax year.

More relief in higher-rent locales: However, 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 location 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.

This announcement typically is made months after the tax agency's general inflation figures release. So for now, we're still working with 2021 higher housing costs for U.S. expatriates, which were announced back in February.

That means a U.S. worker who for all of 2021 rents a home in, for example, some idyllic spots in my ultimate dream location of Italy could get more than this year's basic annual $32,610 housing limit.

In fact, nine Italian locales get higher allowances. They are:

As for next year's higher international housing costs, we won't know the IRS' 2022 take on pricier residential areas around the world until next spring. But feel free to do some online or real-life shopping in advance.

UPDATE, May 1, 2022: The 2022 amounts for expensive international locales has been published by the IRS. Check it out at the aptly, albeit dryly, named post 2022 tax-related housing cost adjustments for expensive international locales.

More 2022 global tax numbers: In addition to the income and housing tax exemptions for U.S. workers abroad, the IRS annual inflation adjustments for 2022 also cover a few additional international tax matters of note.

If you decide after working in another country that you want to make the change permanently, it will cost you tax-wise. If you renounce your U.S. citizenship, you could face an exit tax. This levy is calculated as if the departing U.S. citizen liquidated all of his or her worldwide assets on the day before expatriation, and then any hypothetical net gain from that amount (that is, the deemed liquidation amount minus the expatriate's asset basis) that is more than a certain amount is taxed as capital gains.

The taxing threshold for 2022 expatriates' paper-only liquidations goes to $767,000. That's the amount that can be excluded from the mark-to-market gain upon expatriation of a covered expatriate. That's an increase from 2021's threshold of $744,000.

There also are some gift tax amounts when foreign individuals are involved.

The amount of the annual gift tax exclusion for gifts to non-citizen spouses goes from $159,000 in 2021 to $164,000 next year. The notice of large gifts received from foreign persons trigger goes to $17,339 in 2022. That's an increase from $16,815 in 2021.

And if you're remaining a U.S. citizen but planning to travel around the world, then make sure you pay your taxes. If you have what is declared a serious tax delinquency, the State Department could pull your passport or prevent issuance or renewal of your blue bound U.S. documentation.

For 2022, inflation pushes the amount of a serious, problematic passport delinquent tax debt to $55,000. That's an increase from the $54,000 level.

More foreign tax info: Whatever reason you're headed abroad, either for work or a short-term adventure or permanent relocation, bon voyage and c'est la international taxes!

Definitely enjoy soaking up another country's culture and great food. Yes, it's always about the food for me, with some great art on the side.

And if you end up having to deal with the IRS, definitely use these tax breaks to make sure you pay the U.S. Treasury less so that you can spend those tax savings exploring.

If you want even more about global taxes, you might find these previous Don't Mess With Taxes posts of interest:

• American expatriates don't like paying U.S. taxes
• Nationalism, globalism and worldwide tax competitiveness
• Special circumstances (like living abroad) give some taxpayers more filing time

You also can read more about foreign tax issues in general in IRS Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad. Right now, the 2020 tax year version is still online, but the 2021 version should replace it shortly.

The IRS also has special pages with details on the foreign earned income exclusion. You also should check out the IRS' 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, another one for U.S. taxpayers living abroad and the always poplar FAQs about international individual tax matters. 

Nearing the end of the inflation journey: Yes, I'm finally back on the inflation train — not to be confused with the great rail options across Europe — with this post #8 of the ol' blog's annual inflation series. I appreciate you staying aboard despite the recent interruptions.

As the box below notes, you can get a get a refresher on the previous and upcoming 2022 inflation changes in the series first post.  

This post on 2022 international taxes is Part 8
of the ol' blog's annual series on tax inflation adjustments. 
The 10-part series started with a look at next year's income tax brackets and rates.
That first item also has a directory, at the end of the post,
of all of next year's tax-related inflation updates.
If, after perusing this post on global tax matters, you want to check out
other inflation adjustments for 2022, you'll find the links, when posted, there.
Note: The 2022 figures in this post apply to that tax year's returns to be filed in 2023.
For comparison purposes, you'll also find 2021 amounts that apply to this year's taxes that,
pending any COVID-19 Tax Day delays like we've faced the last couple of years, will be due April 15, 2022.

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