Don't Mess With Taxes

Photo by Kyle Glenn on Unsplash

This Thanksgiving week is a big travel week for millions of Americans.

Most people are heading to friends' and/or relatives' where they'll share a Turkey Day spread. Others are using the time for other, non-holiday recreational pursuits.

By this time next week, they'll be back home. In most cases, they'll return to homes are in the United States. However, thousands of U.S. citizens have relocated internationally.

Despite the location distances, those Americans abroad share something with domestic residents other than celebrating a traditional U.S. holiday. They still owe U.S. taxes on their income, regardless of where it is earned.

Thanks to Uncle Sam's reliance on a worldwide tax system at the individual level, the U.S. Treasury gets a piece of your earnings regardless of where in the world 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.

Here are some highlights in this Part 8 in the ol' blog's annual inflation series.

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 2024 tax year, that earnings amount will be $126,500. That's a nice bump up from 2023's FEIE of $120,000.

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.

This villa looks to be a bit too extravagant to pass the IRS' foreign housing exclusion muster. (Photo by Tom Parandyk on Unsplash)

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 2024, that will be $37,950 ($126,500 x 30%). The 2023 housing exclusion is $36,000 ($120,000 x 30%).

Then the excludable/deductible housing amount is affected by the base housing amount, which also is a percentage of the annual FEIE amount.

The exact figure is 16 percent, making the 2024 amount $20,240 ($126,500 x 16%). The 2023 amount is $19,200 ($120,000 x 16%).

When all the multiplying and subtraction is done, the final 2024 computation means that the most foreign-based workers next year can exclude housing costs from their income of only $17,710.

That amount is arrived at by taking —

That's a $910 increase over the 2023 housing exclusion of $16,800 calculated below:

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 2024 limits. We're still working with 2023 higher housing costs for U.S. expatriates, which were announced on March 14 in Notice 2023-26, Determination of Housing Cost Amounts Eligible for Exclusion or Deduction for 2023.

That means a U.S. worker who for all of 2023 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 $36,000 housing limit.

The hubby and I most often dream of a villa in Italia. If we ever do set up housekeeping in that Mediterranean peninsular nation, we'll take note of the six locations that, for this year, get higher housing allowances. They are:

As for this year's higher international housing costs, we'll have to wait until next spring for the IRS' 2024 take on pricier residential areas around the world. But feel free to follow the hubby's and my example and do some online or real-life shopping in advance.

Additional 2024 global tax numbers: In addition to the income and housing tax exemptions for U.S. workers abroad, the IRS annual inflation adjustments for 2024 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. When you renounce your U.S. citizenship, you could face an exit tax.

First, you must determine if the IRS considers you a covered expatriate. It will do so in in 2024 if the expatriating person's average annual net income tax for the five taxable years ending before the expatriation date is more than $201,000. That's an increase from 2023's $190,000 average income amount.

Then there's the exit tax itself. 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 2024 expatriates' paper-only liquidations goes to $866,000. That's the amount that can be excluded from the mark-to-market gain upon expatriation of a covered expatriate. That's a notable $45,000 increase from 2023's threshold of $821,000.

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 to $185,000 next year, up from $175,000 in 2023.

The notice of large gifts received from foreign persons trigger goes to $19,570 in 2024. That's an increase from 2023's $18,567 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.

For 2024, inflation pushes the amount of a serious, problematic passport delinquent tax debt to $62,000. That's an increase from this year's $59,000 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.

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.

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: And yes, there are even more annual inflation adjustments on the way.

Part 9 on tax penalty amount adjustments is scheduled for tomorrow will be published shortly. My planned 11/21 posting date got bumped by the IRS' second delay of the new 1099-K reporting law. The final post of the 10-part series will be a bit later. It's on mileage rate changes, and the IRS usually issues those figures closer to the end of the year.

As the box below notes, you can check out the seven prior 2024 tax year 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. And thanks especially for your tax inflation interest and explanation patience!

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