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How do U.S. taxpayers living and working abroad report their income?

U.S. citizens and resident aliens must report the income they earn outside of the U.S. annually. There are, however, certain credits and exclusions you can apply to significantly reduce or eliminate your owed taxes. The two main ones are the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC).

Who should use the FEIE?

To use the FEIE, you must be:

  • Physically present in another country for 330 days of the year, or
  • A “bona fide resident” of the country

TurboTax will figure out if you’re eligible for this exclusion or you can use this tool from the IRS.

The FEIE allows you to exclude a significant portion of your income. In 2020, this amount is $107,600, and it’s adjusted annually for inflation. There’s also a housing allowance component of the FEIE that may help you exclude additional income.

Who should use the FTC?

The FTC is beneficial for you if you:

  • Live and work in a foreign country with income taxes (foreign income taxes are often higher than those in the U.S.)
  • Have U.S. citizen children, aged 16 or younger, with social security numbers (You’ll be eligible for the child tax credit)
  • Haven’t previously used the FEIE
  • Contribute to Individual Retirement Accounts (IRAs) or Roth IRAs
  • Need to show a positive number for Adjusted Gross Income (AGI) on your tax return

If you choose to use the FEIE, you can then use the FTC on any income that exceeds the allowed exclusion amount. You can also use the FTC by itself.

Consult a tax professional if you want to switch from exclusively using the FEIE to exclusively using the FTC for all your income. This revokes your FEIE election, making it unavailable to you for 5 years unless you obtain IRS permission with a private letter ruling.

Regulations related to income earned abroad are complex, and many of these situations aren’t entirely covered in TurboTax. Our experts can’t give you specific advice about many areas related to foreign tax issues, but we can let you know which ones the product supports.

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