U.S. citizens and residents abroad can exclude foreign earned income and housing costs from their taxable income under §911. Tax pros must carefully assess these options, consider the complexities of U.S. and foreign earned income, and find ways to mitigate double taxation using foreign tax credits.
Below, you’ll find a few of the top questions and answers from a recent webinar on the topic. If you choose to attend the on-demand version of this webinar, you can access the full recording and the entire list of Q&As.
Q: What types of income are not considered “earned income” for purposes of the foreign earned income exclusion? Could you exclude foreign gambling, prizes, and alimony?
A: Items such as foreign gambling, prizes, alimony, pensions, social security benefits, interest, dividends, and capital gains are not considered “earned income” and, therefore, are not eligible for the exclusion.
Q: My client was working on a cruise ship and had to pay Italian income taxes in 2022. Can the exclusion be used for that income in the U.S.?
A: International waters are not considered a “foreign country.” Employees who work on a cruise ship or vessel in international waters do not have foreign earned income. The client may qualify for the foreign tax credit for Italian taxes paid on the same income.
Q: For the housing exclusion, can you use the 2024 housing cost limits in 2023?
A: Yes, per the most current Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad, “You can elect to apply the 2022 (next year’s) housing cost limits to figure your 2021 (current year) housing exclusion instead of using the 2021 limits. The IRS and Treasury anticipate that you will be able to elect to apply the 2023 limits to figure your 2022 housing exclusion instead of using the 2022 limits.”
Q: Does a totalization agreement impact employees in a foreign country regarding U.S. Social Security?
A: The aim of all U.S. totalization agreements is to eliminate dual social security coverage and taxation. They exempt workers from coverage under the system of one country or the other when their work would otherwise be covered under both systems.
To learn more about navigating the foreign earned income exclusion, you can watch our on-demand webinar. NATP members can attend for free, depending on membership level! If you’re not an NATP member and want to learn more, join our completely free 30-day trial at natptax.com/explore.
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Information included in this article is accurate as of the publish date. This post is not reflective of tax law changes or IRS guidance that may have occurred after the date of publishing. All taxpayer circumstances are different, and NATP recommends contacting research services if you have specific questions about your clients’ tax situations.