IRC § 911(b)(1)(A) provides the definition of “foreign income.” For tax purposes, this provision is important because If certain requirements are met, a taxpayer may qualify for the foreign earned income, foreign housing exclusions and the foreign housing deduction. Under certain circumstances, the value of meals and lodging provided to a taxpayer by an employer may also be excluded from income.
U.S. citizens or a resident aliens of the United States living abroad are taxed on their worldwide income. However, they may qualify to exclude from income up to an amount of their foreign earnings that is adjusted annually for inflation. In 2015, this amount was $100,800. Additionally, certain foreign housing amounts may be excluded or deducted.
Form 1116 relates to foreign tax credits, which are intended to affect taxpayers living abroad. These credits benefit foreign taxpayers by reducing the double tax burden that arises when foreign source income is taxed by both the United States and the foreign country where the taxpayers’ income originates.
The foreign tax must meet four tests to qualify for the foreign tax credit:
- The tax must be a legal and actual foreign tax liability;
- The tax must be imposed on the taxpayer claiming the credit;
- The taxpayer must have paid or accrued the tax; and
Individuals that are U.S. citizens or resident aliens of the United States living abroad are taxed on their income by more than one governmental entity. However, these taxpayers may qualify to exclude from their income an amount of their foreign earnings (adjusted annually for inflation) under I.R.C. § 911. They may also be eligible for either a foreign housing exclusion or the foreign housing deduction (this will be discussed in a future blog). To determine eligibility to claim either the foreign earned income exclusion, the foreign earned housing deduction or foreign earned housing exclusion, please consider the following analysis. Remember, that an experienced tax professional can offer assistance in making this analysis.