Text by Stephanie LaGatta
2023: More Relief from U.S. Worldwide Taxation
U.S. citizens and resident aliens (“green card” holders) must pay taxes on worldwide income. This means that, even if they do not live and only earn income outside the U.S., they must file an annual tax return and pay taxes on any income they earn (regardless of where they earned it). But there is some relief. Congress allows U.S. citizens and resident aliens to not pay Federal income taxes on up to US$120,0000 of foreign earned income per year in 2023.
But, be careful – it does not apply to all income and does not exempt them from all taxes. They can only exclude foreign-earned income (such as wages and other compensation for services performed outside the U.S.). Also, the exclusion only applies to income tax. This exclusion does not reduce payroll taxes (Social Security and Medicare). Similarly, depending on their state of domiciliation or residency, this exclusion may not reduce state income taxes. Finally, there are additional requirements you must meet to avail themselves of this exclusion.
In particular, to qualify for the exclusion, you must be out of the U.S. for 330 days during each 12-month period throughout the tax year or qualify for a bona fide foreign resident test for the entire calendar year. The 330-day test is simple math; you must be out of the U.S. and qualified. It doesn’t matter where you are in the world, so long as you’re not in the U.S.
The bona fide residency test is more complex and based on your intentions. You must move to a foreign country for the “foreseeable future.” This new country should be your home and your home base. When you travel, it’s where you return to. It’s where you lay down roots. It’s where you file taxes and are a legal resident (with a residency permit).
You will likely use the 330-day test in your first year abroad. That will give you time to secure residency, find your home base, and do everything necessary to break ties with the U.S. Beginning January 1st of year two, you will file for the Foreign Earned Income Exclusion using the bona fide residency test. You want to utilize the bona fide residency test when eligible because it will allow you to spend more time in the United States. Under the 330-day test, you can only spend 36 days a year.
Suppose you qualify for the residency test under the foreign-earned income Exclusion for 2023. In that case, you can spend 4 or 5 months a year in the U.S. Remember that only foreign-earned income (earned income for services performed outside the U.S.) can take advantage of the exclusion.
IN THE KNOW: For more tax concerns, please get in touch with the author at info@lagattatax.com or (+51) 949 968 555. All consultations are free and confidential.
About the Author: After graduating from the University of Central Florida with a Bachelor of Science in Accounting, Stephanie pursued her Master’s with an emphasis in taxation. Having lived and worked in multiple countries, including the U.S., Argentina, and Peru, she is very familiar with expat life and the ins and outs of filing taxes abroad It is both her personal experience as well as her formal training that makes Stephanie’s service is unique and accessible to those in need of tax-related services