Internal Revenue Code Section 911
In order to actively promote investment outside the United States, Congress voted to allow a limited amount of foreign wages to be excluded from U.S. federal income taxation ($104,100 in 2018). To qualify for this exclusion, an individual must have a tax home in a foreign country or countries, and earn income from employment or self-employment outside the United States. If the U.S. taxpayer meets the tests set by the Internal Revenue Code, he or she may elect to exclude some or all of his or her foreign earnings from U.S. taxation. The individual may also elect to exclude a portion of his or her foreign housing costs, thereby further reducing U.S. taxation.
Qualification Tests
To be eligible to claim any exclusion under Internal Revenue Code Section 911, the U.S. citizen or resident must meet one of two tests.
Bona Fide Residence Test
- The individual must be a U.S. citizen or resident alien.
- The individual must reside in a foreign country for at least an entire calendar year.
- The individual must not claim to be a non-resident of the foreign country.
- If the foreign country has an income tax, the individual’s earned income must be subject to that tax.
Physical Presence Test
- The individual must be a U.S. citizen or resident alien of the U.S.
- A valid election must have been made.
- The individual must have changed his or her tax home from the U.S to the foreign country.
If either the Bona Fide Resident or Physical Presence test is satisfied, a U.S. person working outside the U.S. could save substantial amounts in U.S. income tax on foreign source income. In addition, a U.S. taxpayer may deduct the following housing expenses:
- House/apartment rental.
- Utility expenses (excluding telephone and cable television expenditures).
- Costs of household repairs.
- Real and personal property insurance.
- Occupancy taxes.
- Costs of renting furniture and accessories.
- Charges for residential parking.
- Temporary lodging costs.
If you are currently or will be working outside the U.S. for your employer or for your own company, let the international tax attorneys at Diosdi & Liu, LLP provide you with a comprehensive plan to reduce your global taxes. Contact us now for a consultation!