5 tax moves to make this November
7 workplace benefits issues, tax & otherwise, to consider this enrollment season

Inflation adjustments for 2023 taxes that apply to Americans abroad

Italy_Amalfi-Coast_Positano_Fornillo-Beach_Mihael-Grmek_Wikipedia-Commons1
Fornillo Beach in Positano along Italy's Amalfi Coast. (Photo by Mihael Grmek via Wikipedia Commons)

The hubby and I just finished watching the second season of Stanley Tucci's culinary trek across Italy. So, at least for a few more weeks, we're thinking (OK, dreaming) about moving to that boot-shaped Mediterranean peninsula.

If we did, which we won't, we wouldn't renounce our U.S. citizenship. That comes with too steep a tax price.

But officially remaining American nationals also carries a tax cost.

Most Americans who move abroad still owe U.S. taxes on their income, regardless of where it's earned. That's because Uncle Sam still relies on a worldwide tax system at the individual level. The U.S. Treasury gets a piece of your earnings regardless of where you make it.

There are, however, some tax provisions that can help U.S. workers in other countries. And like many parts of the Internal Revenue Code, they 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 2023 tax year, that earnings amount will be $120,000. That's a nice bump up from 2022's FEIE of $112,000.

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, that is, money from work.
  • 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 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.

Villa La Gaeta Lake Como Italy James Bond_VRBO
Residences like the stunning Villa Gaeta, perched along Lake Como, Italy, likely won't pass the IRS' foreign housing exclusion muster. If you're thinking this mansion looks familiar, then you're probably a 007 fan. It was seen in the finale of James Bond's "Casino Royale." (Image courtesy VRBO)

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 2023, that will be $36,000 ($120,000 x 30%). The 2022 housing exclusion is $33,600 ($112,000 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 2023 amount $19,200 ($120,000 x 16%). The 2022 amount is $17,920 ($112,000 x 16%).

When all the multiplying and subtraction is done, the final 2023 computation means that the most foreign-based workers next year can exclude housing costs from their income of only $16,800.

That amount is arrived at by taking —

 

$36,000

($120,000 x 30%) ceiling

$19,200

($120,000 x 16%) base

$16,800

final foreign housing tax break

That's a $1,120 increase over the 2022 housing exclusion amount calculated below:

 

$33,600

($112,000 x 30%) ceiling

$17,920

($112,000 x 16%) base

$15,680

final foreign housing tax break

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 don't have 2023 limits. We're still working with 2022 higher housing costs for U.S. expatriates, which were announced in Notice 2022-10 back in March.

That means a U.S. worker who for all of 2022 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 $33,600 housing limit.

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

Aviano at $37,700

Milan at $70,600

Rome at $47,300

Genoa at $41,800

Naples at $48,500

Turin at $35,900

La Spezia at $40,400

Parma at $35,900

Vicenza at $39,500

As for next year's higher international housing costs, again we won't know the IRS' 2023 take on pricier residential areas around the world until next spring. But feel free to do some online or real-life shopping in advance.

More 2023 global tax numbers: In addition to the income and housing tax exemptions for U.S. workers abroad, the IRS annual inflation adjustments for 2023 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, as I noted at the top of this post 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 2023 expatriates' paper-only liquidations goes to $821,000. That's the amount that can be excluded from the mark-to-market gain upon expatriation of a covered expatriate. That's a notable $54,000 jump from 2022's threshold of $767,000.

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 $164,000 in 2022 to $175,000 next year. The notice of large gifts received from foreign persons trigger goes to $18,567 in 2023. That's an increase from 2022's $17,339 trigger.

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. The U.S. Supreme Court let that passport revocation authority stand early this year by refusing to hear an affected taxpayer's case.

For 2023, inflation pushes the amount of a serious, problematic passport delinquent tax debt to $59,000. That's an increase from this year's $55,000 level.

More foreign tax info: Whatever reason you're headed abroad, either for work or a short-term adventure or permanent relocation, buon viaggio 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:

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, Part 8 in the ol' blog's annual inflation series. I appreciate you staying aboard despite the recent interruptions.

I'll post Part 9 on tax penalty amount adjustments in the next few days. The IRS usually issues the amounts in the final segment, mileage rate changes, closer to the end of the year.

You can see the prior seven inflation posts, as well as some related items that went up earlier, in the directory at the end of this year's first inflation post

Thanks for reading this part and all the rest. And thanks especially for your tax inflation interest and explanation patience.

This post on inflation changes in 2023 to foreign earnings
and other international tax matters
is
Part 8 of the ol' blog's annual series on myriad 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 the posted and upcoming tax-related inflation updates for 2023.
Note: The 2023 figures in this post apply to that tax year's returns to be filed in 2024.
For comparison purposes, you'll also find 2022 amounts that apply
to this year's 2022 taxes that will be due April 18, 2023.

 

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