How to Treat Foreign Earned Income
There is a tax incentive for working abroad. Income earned abroad may escape U.S. income taxes and you may be entitled to an exclusion or deduction for certain housing costs. In measuring the economic value of this tax savings, consider the extra cost of living abroad. In some areas, the high cost of living and currency exchange rates will erode your tax savings.
- The exclusion does not apply to investment income or to any other earned income that does not meet the exclusion tests.
- To claim the foreign income exclusion, you must satisfy a foreign residence or physical presence test.
- Employees of the U.S. government may not claim an exclusion based on the government pay earned abroad.
