As a U.S. citizen or resident alien, you are taxed on your worldwide income, regardless of where you live or work. However, there are provisions that could potentially reduce or even eliminate your U.S. tax liability on foreign-earned income.
Foreign Earned Income Exclusion (FEIE): If you meet certain requirements, you may qualify for the FEIE, which allows you to exclude a certain amount of your foreign earned income from U.S. tax. For 2021, the maximum exclusion is $108,700.
Foreign Housing Exclusion or Deduction: In addition to the FEIE, you may also qualify for an exclusion or deduction for certain housing costs that exceed a base amount.
Foreign Tax Credit: If you pay or accrue tax to a foreign country on your foreign income, you may be able to take a credit for those taxes.
These provisions can significantly reduce your U.S. tax, but they do not exempt you from the requirement to file a U.S. tax return. Also, they do not apply to self-employment tax. If you're self-employed and qualify for the FEIE, you must still pay U.S. self-employment tax on your foreign earnings.
Great news! The United States has Totalization Agreements with numerous countries. Under these agreements, the self-employed will only pay Social Security taxes to the country they are working in.
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