Uncle Sam wants to tax your income, no matter where you earn it.
As a general rule, all income received by a U.
S.
citizen or resident is subject to U.
S.
income tax, no matter where it is earned.
Further, as long as you are considered a U.
S.
citizen or resident, you are forever required to file a U.
S.
income tax return.
Forever.
But like most pieces of tax legislation, there are exceptions.
The exceptions to this general rule allow such individuals to exclude a portion of their world-wide income earned outside the U.
S.
The two exceptions available are known as the foreign earned income exclusion and the foreign housing exclusion (rent, utilities, renters' insurance and maintenance expenses).
This article will address the application of these two rules.
In order to qualify for the foreign earned income and foreign housing exclusions U.
S.
, citizens or residents must be a bone fide resident of a foreign country for a complete calendar year and be physically present outside the U.
S.
for 330 full days during 12 consecutive months.
In order for these exception rules to apply, you must make an election on form 2555, which is attached to your U.
S.
income tax return.
The election is due within one year of the original filing due date for your tax return.
For tax year 2010, this means that you must file form 2555 by April 15, 2012 in order for these two exceptions to apply.
If you don't make the election you are prohibited from claiming these exclusions.
2010 Exclusion Amounts 1.
Foreign Earned Income Exclusion For 2010 the amount of the foreign earned income exclusion is set at $91,500.
This means, when properly elected, you can exclude up to $91,500 of income earned outside the U.
S.
2.
Foreign Housing Exclusion For 2010 the amount of the foreign housing exclusion deduction is limited to total housing costs of $27,450 (30% multiplied by $91,500) less a base amount of $14,640 (16% multiplied by $91,500).
Housing costs include items such as rent, utilities, renters' insurance and maintenance costs.
This means that if your housing costs are $27,640 or more, your deduction is capped at $13,000 ($27,640 less $14,640).
What if you fail to make a timely election? Fortunately all is not lost.
You are always entitled to what is called a foreign tax credit.
The foreign tax credit is a dollar for dollar offset against U.
S.
income tax for foreign taxes paid, on the same income, to a foreign country.
There are instances when utilizing the foreign tax credit results in a greater U.
S.
tax benefit, so you need to check with your tax advisor to make sure the foreign income exclusion election is right for you.
As a general rule, all income received by a U.
S.
citizen or resident is subject to U.
S.
income tax, no matter where it is earned.
Further, as long as you are considered a U.
S.
citizen or resident, you are forever required to file a U.
S.
income tax return.
Forever.
But like most pieces of tax legislation, there are exceptions.
The exceptions to this general rule allow such individuals to exclude a portion of their world-wide income earned outside the U.
S.
The two exceptions available are known as the foreign earned income exclusion and the foreign housing exclusion (rent, utilities, renters' insurance and maintenance expenses).
This article will address the application of these two rules.
In order to qualify for the foreign earned income and foreign housing exclusions U.
S.
, citizens or residents must be a bone fide resident of a foreign country for a complete calendar year and be physically present outside the U.
S.
for 330 full days during 12 consecutive months.
In order for these exception rules to apply, you must make an election on form 2555, which is attached to your U.
S.
income tax return.
The election is due within one year of the original filing due date for your tax return.
For tax year 2010, this means that you must file form 2555 by April 15, 2012 in order for these two exceptions to apply.
If you don't make the election you are prohibited from claiming these exclusions.
2010 Exclusion Amounts 1.
Foreign Earned Income Exclusion For 2010 the amount of the foreign earned income exclusion is set at $91,500.
This means, when properly elected, you can exclude up to $91,500 of income earned outside the U.
S.
2.
Foreign Housing Exclusion For 2010 the amount of the foreign housing exclusion deduction is limited to total housing costs of $27,450 (30% multiplied by $91,500) less a base amount of $14,640 (16% multiplied by $91,500).
Housing costs include items such as rent, utilities, renters' insurance and maintenance costs.
This means that if your housing costs are $27,640 or more, your deduction is capped at $13,000 ($27,640 less $14,640).
What if you fail to make a timely election? Fortunately all is not lost.
You are always entitled to what is called a foreign tax credit.
The foreign tax credit is a dollar for dollar offset against U.
S.
income tax for foreign taxes paid, on the same income, to a foreign country.
There are instances when utilizing the foreign tax credit results in a greater U.
S.
tax benefit, so you need to check with your tax advisor to make sure the foreign income exclusion election is right for you.