As an American you are required to report your worldwide income annually while you file your US Tax Return, no matter you live in the US or you live abroad!

Living abroad, you will take advantage of the following deductions:

  • Standard or Itemized Deductions – same as living in US
  • Foreign Earned Income Exclusion
  • House Deductions
  • Foreign Paid Tax Credit
  • US Retirement plans i.e. IRS and SEP

Foreign Earned Income Exclusion

While preparing your form 2555 which is part of the 1040 form for American living abroad you must physically present in a foreign country for at least 330 days a year and a US Person (US Citizens, or Green Card Holder).

As a U.S. citizen or a resident alien of the United States and you live and work abroad, and as you are taxed on your worldwide income. You will be qualified to exclude your foreign earned income that changes annually i.e., in 2018 the exclusion is up to $103,900, in 2019 the exclusion is up to $105,900 and in 2020 the exclusion is up to $107,600.

House Deduction Exclusion

Form 2555 will also cover the house expenses that occur while you live abroad, so you can claim certain house annual expense such as, rent, utilities, repair and maintenance, insurance, security, parking and rental furniture. The total qualified annual house expenses subject to the minimum expenses allowed by the IRS as well as the city where you live limits, for most locations, this limit is $32,280 as $88.20 per day, all cities provided in the form 2555 instructions. Read more Source: https://www.irs.gov/forms-pubs/about-form-2555

Example 1

American reside and work in Paris, France

  • Total annual house expenses are $64,312.00
  • Paris City Limit (maximum deduction) by IRS $69,400
  • IRS House Expenses excluded minimum is $16,944
  • Qualified annual house expenses = actual expenses ($64,312) – IRS disallowed amount ($16,944) = $47,367 and not to exceed city maximum qualified house expenses ($64,312.00)

Example 2

American reside and work in Dubai, UAE

  • Total annual house expenses are $94,312.00
  • Paris City Limit (maximum deduction) by IRS $57,174
  • IRS House Expenses excluded minimum is $16,944
  • Qualified annual house expenses = actual expenses ($64,312) – IRS disallowed amount ($16,944) = $77,506 and not to exceed city maximum qualified house expenses ($57,174)

In this example as we are limited to $57,174 then the annual house expenses will be $57,174

Take advantage of any paid foreign tax to avoid the double taxation

As a US Citizen or a Green Card Holder reside outside the United States in a country that cost you taxers on all of your earned income within this country, you may be qualified to take a tax credit to offset your US tax liabilities based on the tax treaty between the country you live in and United States of America.

 

Note.

Foreign earned income exclusion and houses expenses are not carried back or forward unlike the paid foreign income tax credit if a taxpayer could not use it in the current year, he/she may apply it to the prior year’s US Tax liabilities or carry it forward for years to cone US Tax liabilities and a taxpayer may elect one direction either carry back or carry forward not both.

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