Tax Exclusions Available to American Overseas Contractors

The foreign earned income exclusion has existed within the Internal Revenue Service’s Tax Code since the 1920’s. Originally, all foreign earned income was excluded from Federal taxes. During the ensuing decades numerous changes and interpretations were applied to the code. The basic principal behind the exclusion is to make Americans who work overseas more competitive to their foreign counterparts and, promote U.S. exports, international business opportunities and growth.

 

In 1981 the U.S. Congress passed the Economic Recovery Act of 1981, increasing the exclusion from $20,000 to $75,000. Since then the exclusion amount has been revised several times. Starting with tax year 2006, the foreign earned income exclusion has been adjusted each year for inflation by the Internal Revenue Service. However, by international standards, the U.S.'s approach is conservative. While the United States does exclude some foreign earned income for U.S. citizens or resident aliens working abroad, most major industrial nations exclude all foreign earned income from taxes.

 

The Basics

To qualify for the Foreign Earned Income Exclusion you must meet the following requirements:

  1. Your tax home must be in a foreign country.
  2. You must have foreign earned income.
  3. You must be either:
    1. A U.S. citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year,
    2. A U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year or
    3. A U.S. citizen or a U.S. resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.