Tax Breaks for U.S. Citizens Overseas
In general, the IRS taxes all worldwide income of U.S. citizens and resident aliens. It also allows the same tax credits and deductions as U.S. citizens and residents from the U.S. living in the United States. If your job is abroad, you cannot exclude, claim, or deduct a credit for any item that can be allocated to or changed against excluded housing or foreign earned income amounts. This includes any losses, expenses, and other normally deductible items are allocable to the excluded income. You can only deduct expenses that are connected with earning includible income.
The rules above only apply to items that are definitely related to excluded earned income and don't apply to other items not related to any particular type of income. These other types of income include:
Based on these rules, your housing deduction is not treated as allocatable to your excluded income. However, the deduction for self-employment tax is treated as allocatable to your excluded income.
Tax Credit for Taxes Paid to a Foreign Country
If you are a U.S. citizen working and/or living overseas and you pay taxes to a foreign country, you can choose each tax year to take the amount of a qualified tax paid or accrued during the year as an itemized deduction or a foreign tax credit. The foreign tax credit is intended to relieve US taxpayers of the double tax burden when their foreign source income is taxed by the United States and the foreign country from which the income is derived. Only income taxes accrued or paid to a foreign country or U.S. possession qualify for the foreign tax credit.
The foreign income tax for which you claim a credit is the amount of actual and legal tax liability you accrue or pay during the tax year. This amount is essentially the amount withheld by the foreign country. However, you can't take a foreign tax credit for income you paid to a foreign country that would be refunded by that country if you made a claim for refund.
To claim the credit, simply prepare and file with eFile.com and we will generate and complete the proper forms for you. For this credit, the app will complete Form 1116, Foreign Tax Credit, and attach it to your 1040 Form for e-filing. The form is used to figure out the amount of foreign tax accrued or paid that can be claim as a foreign tax credit. The amount of foreign tax paid or accrued will not be included as withheld federal income taxes on line 62 of your 1040 Form. Navigate here for a full list of income tax return forms if you work and/or live abroad.
U.S. Foreign Tax Credit Limit
The Foreign Tax Credit limit is the part of your total U.S. tax that's in proportion to your taxable income from sources outside the United States compared to your total taxable income. The allowable credit amount can't be more than your actual foreign tax liability.
You may claim a foreign tax credit without limitation and will not have to attach Form 1116 if you meet all of the following requirements:
- All of your foreign source income for the tax year is passive income (dividends, interest, royalties, etc.) reported to you on qualified payee statements (such as Form 1099-DIV, 1099-INT).
- The total amount of qualifying foreign taxed you accrued or paid is not more than $300 ($600 for joint tax return), is paid to countries the United States recognizes, and is reported on a payee statement.
- You elect this procedure (note that you can't carry back or carry over any unused foreign tax to or from a different year).
Instead of worrying about all these rules and limits, let the eFile Tax App figure out your eligibility based on the information you input when you e-file your tax return.
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Claiming the Credit for Receiving Foreign Tax Payments as Subsidies
If a foreign country returns your foreign tax payments to you as a subsidy, you can't claim a foreign tax credit based on these payments. This rule applies to subsidies provided by any means that are determined (directly or indirectly) by reference to the amount of tax, or to the base used to figure the tax. Subsidies are provided in the following ways:
If the subsidy is given to a person related to you or individuals who participated in a transaction or a related transaction with you, you cannot claim a foreign tax credit.
How to Claim an Itemized Deduction on Your U.S. Income Tax Return
In order to claim an itemized deduction, simply prepare and file with eFile.com and we will generate and complete Schedule A for you. There are various items that can only be claimed as a deduction. On income you exclude under the foreign housing exclusion or the foreign earned income exclusion, you may not take a deduction nor a credit for taxes accrued or paid on the income. In this situation, there's no double taxation since the income is not subject to U.S. tax.
Can Children Be Claimed as Dependents if They're Not Born in the U.S.?
Claiming a child as a dependent is an important part of filing your taxes. Usually, children are citizens or residents of the same country as their parents. In general, if you were a U.S. citizen when your child was born, your child is a U.S. citizen. This is true even if the child's other parent is a non-resident alien, the child was born in a foreign country, and the child lives abroad with the other parent. If you have legally adopted a child who is not a U.S. citizen, U.S. resident, or U.S. national, the child will meet the citizen requirement if you're a U.S. citizen or U.S. national and the child lived with you as a member of your household the entire year.
There are simple rules for children and dependents. In order for the person to be your dependent on your return, he or she must be one of the following for some part of the calendar year:
- A U.S. citizen,
- A U.S. national,
- A U.S. resident alien, OR
- A resident of Canada or Mexico.
To see if someone qualifies as a dependent on your taxes, use the eFile DEPENDucator tool to determine whether or not someone can be claimed. For more child and dependent resources, learn more about Child and Dependent Care Expenses or the Child Tax Credit.
You must include the Social Security Number (SSN) of each person you are claiming as a dependent. To get an SSN for a dependent, apply at a Social Security office or US consulate. You must provide original or certified copies of documents to verify the dependent's identity, age, and citizenship before completing and mailing Form SS-5, Application for a Social Security Card, with this information.
If you don't have a SSN for a child who was born and passed away in the same year, attach a copy of the child's birth certificate on your return. When filing with eFile.com, the eFile app will enter "Died" in column (2) of line 6c on your Form 1040. If your dependent is a U.S. non-resident who is not eligible to get a social security number, you must list the dependent's Individual Taxpayer Identification Number (ITIN) instead of an SSN.
To apply for an ITIN, complete and file Form W-7 as you cannot e-file using a new ITIN. In other words, if you file for and receive an ITIN, you will be able to start e-filing with that number the following year. It usually takes 6 to 10 weeks to get an ITIN. If you are renewing an existing ITIN, do so immediately. You should enter your dependent's ITIN wherever a SSN is requested on your return.
See how to file a return with your ITIN application using eFile.com.
Can Moving Expenses from the United States to Another Country Be Deducted?
You can only deduct the expenses for moving to a new home because of your job or business if one of the following applies:
- You are an active-duty military member or
- You are an employee who incurred reimbursed expenses dated before January 1, 2018 and did not claim them on a prior tax return. For 2019 and later returns, you generally can not deduct moving expenses.
In general, in order for the moving expenses to be deductible, they must have been paid or incurred in connection with starting working at a new job location. The IRS defines a foreign move as "a move in connection with the start of work at a new job location outside the United States and its possession." It adds that the move "does not include a move back to the United States or its possessions."
As active-duty military only, your moving expenses are directly connected with your income earned in a foreign country when the country is your new place of work. However, if you exclude part or all of your earned income at the new location under the foreign earned income exclusion or the foreign housing exclusion, you can't deduct the part of your moving expense that's allocable to the excluded income. In addition, you can't deduct the part of the moving expense that's related to the excluded income for a move from a foreign country to the U.S. if you receive a reimbursement that you're able to treat as compensation for services performed in the foreign country.
When preparing to file with eFile.com, we will help you report your moving expenses on Form 3903, Moving Expenses. In addition, we will report your moving expense deduction on Form 1040 on line 26. If you must reduce your expenses by the amount allocatable to excluded income, attach a statement to your tax return showing how you figured this account.
If you violate U.S. travel restrictions, you will not be treated as physically present in, or as a bona fide resident of, a foreign country for any day during which you're present in a country that's in violation of the restrictions. In general, these restrictions prohibit U.S. citizens and residents from engaging in transactions related to travel to, from, or within certain countries.
In addition, income that is earned from sources within such a country for services performed during a period of travel restrictions doesn't qualify as foreign earned income. Housing expenses within that country (or outside the country for your dependents or spouse) while you're in violation of travel restrictions can't be included in figuring your foreign housing amount. Please note that these restrictions currently apply only to Cuba. If you performed services at the U.S. Navel Base at Guantanamo Bay, these restrictions don't apply.
Other Credits, Deductions When Claiming the Foreign Earned Income Exclusion
Once you choose a foreign earned income exclusion to claim, you cannot claim a foreign tax credit or deduction on the excluded income. If a foreign tax credit or deduction is taken on any of your excluded income, your foreign earned income exclusion will be considered revoked.
However, you may qualify for an exclusion from tax of a limited amount of foreign earned income (generally, income received for services you perform in a foreign country), but you must file a return to claim it. In addition, you may be able to claim a deduction or exclusion from gross income for a limited amount of your housing costs if the costs are more than a base amount. In general, you'll qualify for these benefits if your tax home is in a foreign country or countries throughout your period of physical presence or bona fide foreign residence and you're either one of the following:
- A U.S. citizen who's a bona fide resident of a foreign country or countries for an uninterrupted period that includes the entire year,
- A U.S. resident alien who's a citizen or national of a country with which the U.S. has an income tax treaty in effect and who's a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year, OR
- A U.S. citizen or U.S. resident alien who's physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.
If you receive foreign earned income in a tax year after the year in which you earned it, but you didn't receive it, you may have to file an amended tax return for the earlier tax year. That way, you can properly adjust the credit, deduction, or exclusion amounts that are allocatable to your foreign earned income and housing exclusions.
Social Security Taxes When Living and/or Working in a Foreign Country
You should check whether your country of residence and/or employment has a tax treaty that excuses you from double taxation on international Social Security. IRS Publication 901, U.S. Tax Treaties, contains detailed information on American foreign tax treaties and tells you where you can find copies of the treaties. You may not have to pay international Social Security Taxes if your country is in a Totalization Agreement with the United States. The purpose of this agreement is to allow you to not pay twice on your foreign income if you are a U.S. citizen or resident alien.
Currently, the following nations are in Totalization Agreements with the United States:
- Australia
- Austria
- Belgium
- Brazil
- Canada
- Chile
- Czech Republic
- Denmark
- Finland
- France
- Germany
- Greece
- Hungary
- Iceland
- Ireland
- Italy
- Japan
- Luxembourg
- Netherlands
- Norway
- Poland
- Portugal
- Slovak Republic
- Slovenia
- South Korea
- Spain
- Sweden
- Switzerland
- Uruguay
- United Kingdom
Other Benefits of U.S. Tax Treaties with Foreign Countries
U.S. tax conventions or treaties with many foreign countries allow U.S. residents to obtain certain deductions, credits, and lower foreign tax rates. You may be able to pay less taxes to these countries if you take advantage of these tax benefits. For instance, most foreign tax treaties allow U.S. residents to exempt part of their income for personal services from the treaty country's income tax if they are in the treaty country for a limited number of days. In addition, foreign tax treaties generally provide U.S. teachers, students, and trainees with special exemptions from the foreign treaty country's income tax. Note: for 2018 through 2025, tax exemptions are discontinued.
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