There was good news for American expats recently regarding their US income tax returns:
- The foreign earned income exclusion for 2013 increased to $ 97,600 from the 2012 level of $ 95,100.
- Tax rates for income below US $ 400,000 remain unchanged.
Americans living outside the US must continue to file US income tax returns and pay US taxes on their worldwide income. They can use one or both of the two benefits to reduce their US tax:
- Foreign tax credit, and
- Exclusion of income from work abroad.
A credit is allowed for foreign income taxes paid or increased. The credit is limited to the portion of the US tax due to foreign source income. It is not refundable, but any excess credit can be carried over to other years to reduce taxes.
Exclusion of income earned abroad
Also, an American living and working outside the US (Expatriate) can exclude from taxable income his or her income earned from working outside the US This exclusion is divided into two parts. The basic exclusion is limited to USD 95,100 for fiscal year 2012 and USD 97,600 for fiscal year 2013. These amounts are determined on a daily pro rata basis for all days the expatriate qualifies for the exclusion. Also, the expat can exclude the amount he paid for housing in a foreign country in excess of 16% of the basic exclusion. This housing exclusion is limited by jurisdiction. For 2012, the housing exclusion is the amount paid in excess of USD 41.57 per day. For 2013, amounts greater than $ 42.78 per day can be excluded.
To qualify for the exclusion, the taxpayer must meet one of two tests: the bona fide resident test or the physical presence test. The test is applied separately to each day of the fiscal year. To meet the bona fide resident test, the expat must be a resident of a foreign country on that day and the day must be in a period of that residency that includes a full tax year. To meet the physical presence test, you must be outside the US The day and the day must be in a 365-day period that includes 330 days outside the US. For the last test, there may be periods qualifying 365-day overlays.
Example: Jerry, a US citizen, earns $ 105,000 from his salary and is a resident of Zaire. Jerry has no other income. Due to the exclusion, personal exemption, and standard deduction, Jerry will have no US income tax.
Tax rates
Congress finally acted on New Year’s Day, passing the “tax cliff” legislation. This law expanded the existing tax structure for single taxpayers with taxable income less than $ 400,000 and married taxpayers with taxable income less than $ 450,000. For those with higher incomes, the maximum tax rate was increased to 39.6%. These limits are determined prior to the foreign earned income exclusion.
Example: Mary, a US citizen, is single and lives in Bermuda. She earns a salary of $ 450,000. Part of Mary’s income will be subject to US income tax at the 39.6% tax rate.
Furthermore, exclusion is not the only good thing that increased. The level of income to which each tax bracket is applied also increased due to inflation.
US expats must file US income tax returns by June 15 following the tax year. They can get an automatic extension to file their returns until October 15.
Rising foreign earned income exclusion, rising tax bracket income levels, and continued lower Bush-era tax rates are good news for all American expats. Tax rules for expats are complex. Get the professional help you need to file your return correctly and minimize your US taxes.
