Don't Mess With Taxes

Photo by Julentto Photography on Unsplash

International travel is a dream for many Americans. Some enjoy their jaunts so much, they decide to move instead of just vacation abroad.

A foreign relocation means many changes. But one thing doesn’t change.

U.S. citizens who live and work abroad still owe U.S. taxes on their income. 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 7 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 2025 tax year, that earnings amount will be $130,000. That's a nice bump up from 2024's FEIE of $126,500.

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.

This foreign housing exclusion helps offset the expenses of living overseas. It can be used for housing-related expenses not paid by your U.S.-based employer. This includes a variety of costs, including rent, utilities, repairs, property insurance, and parking fees near your home. It does not include cable, phone, or domestic help 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 or the cost to get your loo’s water flowing properly. There's plenty of added math.

First, start with your residential expenses. And note that the Internal Revenue Service 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.

Enjoying the stars poolside at this house in Spain might set off the IRS' foreign housing extravagance meter. (Photo by Vita Vilcina 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 2025, that will be $39,000 ($130,000 x 30%). The 2024 housing exclusion is $37,950 ($126,500 x 30%). This is the upper limit on the amount you can exclude or deduct from your foreign housing costs.

But wait. There’s more. The excludable/deductible housing amount also 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 2025 amount $20,800 ($130,000 x 16%). The 2024 amount is $20,240 ($126,500 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.

Part VI of Form 2555, Foreign Earned Income deals with the housing exclusion or deduction. You’ll find a Limit on Housing Expenses Worksheet in the form’s instructions. Your best move, however, is to find a tax service or professional who specializes in U.S. expatriate taxes.

Relief in higher-rent locales: If you are, like the hubby and me, a fan of HGTV House Hunters International, you know that sometimes it's hard to find the kind of international residential bargain that the IRS will reward with a tax break.

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. It’s also included at the end of the tax-year-updated Form 2555 instructions.

But for now, since we don't have 2025 limits, we're working with information in IRS Notice 2024-31, Determination of Housing Cost Amounts Eligible for Exclusion or Deduction for 2024, issued in March.

That means a U.S. worker who for all of 2024 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 $37,950 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 2024 get higher housing allowances. They are:
   

    
As for 2025's higher international housing costs, we'll have to wait until next spring for the IRS' 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.

Expatriation tax adjustments: If you decide after working in another country that you want to more fully, permanently become a part of your new international home, 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 2025 if the expatriating person's average annual net income tax for the five taxable years ending before the expatriation date is more than $206,000. That's an increase from 2024’s $201,000 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 2025 expatriates' paper-only liquidations goes to $890,000. That's the amount that can be excluded from the mark-to-market gain upon expatriation of a covered expatriate. That's a notable $24,000 increase from 2024's threshold of $866,000.

Additional 2025 global tax numbers: In addition to the foreign income, housing, and expatriation tax matters, the IRS annual inflation adjustments for 2025 also cover a few additional international tax matters of note.

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 $190,000 next year, up from $185,000 in 2024.

The notice of large gifts received from foreign persons trigger goes to $20,116 in 2025. That's an increase from 2024's $19,570 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 2025, inflation pushes the amount of a serious, problematic passport delinquent tax debt to $64,000. That's an increase from this year's $62,000 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 with that, we wrap up our international detour in Part 7 of the ol' blog's annual 10-part tax inflation series. But the remaining three parts are on the way.

As the box below notes, you can find a directory in the series' first post, with links to already published inflation adjustments, as well as preview of what's still to come.

Thanks for reading. And thanks especially for your tax inflation interest and explanation patience!

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