Tax-Free income Overseas

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For Americans working overseas, nearly ,000 a year of their earned revenue is tax free. This totally legal tax break is called the Foreign Earned revenue Exclusion. Here is a look at this tax break, how it lowers tax burdens and why the government grants it.

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What exactly is the Foreign Earned revenue Exclusion? The Irs defines it like this:

"For this purpose, foreign earned revenue is revenue you receive for services you achieve in a foreign country during a duration your tax home is in a foreign country and during which you meet either the bona fide residence test or the corporal presence test."

On other words, money earned for work performed by those residing overseas qualifies for the exclusion. There are two ways to qualify for this exclusion. One is to be a bona fide resident. Taxpayers can quality for this when they are bona fide residents overseas for an uninterrupted duration over an whole tax year. The other is to pass the corporal presence test. This is defined by the Irs as "if the taxpayer is physically gift in a foreign country or countries 330 full days during a duration of 12 consecutive months."

Earned revenue is defined as the salaries, wages, bonuses and pro fees that are paid for services performed while working overseas. Therefore, revenue such as capital gains, dividends, royalties etc. Received while overseas are still legally taxable.

However, even though dividends and other unearned revenue are not excluded from taxes, the foreign earned revenue exclusion still lowers the rate at which these incomes are taxed. For example, if all the taxpayers earned revenue is excluded, their tax liability starts with their unearned income. If the total of the unearned revenue is less than their deductions, they still will not owe the Irs any taxes. If this revenue exceeds their standard deductions, the tax rate paid should still be lower since their deducted earned revenue does not push unearned revenue into a higher tax bracket.

However, working overseas is not a tax-free nirvana for most people. The main guess is that, apart from a few exceptions, most countries have revenue taxes too and regularly tax foreign workers at the same rate they would tax their own citizens. These rates are sometimes higher than Us rates.

Still, in sometimes gray areas of the law, foreign workers often slip under the tax radar. Also, dissimilar national tax jurisdictions regularly do not work together. With revenue in dissimilar countries, it is unlikely any one tax jurisdiction will know the total revenue for any single taxpayer, especially if that taxpayer is a foreigner.

Why does the Us government give this exemption? The major guess given is the competitiveness of Us workers overseas. If overseas Us workers have to pay Us taxes while working overseas (many nations do not tax their nationals working overseas at all), Us workers will be relatively more costly to employ than those from countries that do not tax citizens working overseas.

Also, while Americans working overseas are not commonly using taxpayer funded services, they are often pump money into the Us economy when the send money back, shop on trips to the Us and other occasions. Thus, there are economic advantages provided by Americans working overseas.

The overseas tax exclusion does have clear tax advantages. However, these advantages are not as great as one might think on first glance, and there are economic reasons for giving this tax break.

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