Tax Rule for U.S. Citizens and Resident Aliens Abroad
For citizens of the United States and resident aliens living abroad, the general rule for both is the same: your worldwide income is subject to U.S. income tax regardless of where you reside. You must file yearly income tax and pay estimated tax whether you are living in the United States or abroad. If you reside overseas or are in the military on duty outside the U.S., the IRS allows an automatic two- month extension until June 15th to file the tax return. However, to avoid interest, any tax due must be paid by the original date of April 15th.
Foreign earned income includes wages, salaries, professional fees and other amounts received as compensation. Qualified persons who live and work abroad may elect to exclude from their gross income a certain amount of foreign earned income related to residence in a foreign country during the tax year. The exclusion is $92,900 for 2011 and $95,100 for 2012. Also, to prevent income from being subject to double taxation, you may be entitled to a credit for taxes paid or accrued to a foreign country.
In order to qualify for the foreign earned income exclusion, individuals’ tax home must be in a foreign country and they must satisfy either the bona fide residence test or the physical presence test. Qualified individuals must make a separate election with respect to the foreign earned income exclusion and they must file Form 2555 by the tax deadline. Once the election is made, it will remain in effect for the current tax year and all subsequent years unless revoked. Taxpayers who revoke the election will be prohibited from making a new election for at least the next five years, unless they obtain IRS approval.