Overseas Tax Returns

Over the years, we have observed that many clients have received bad advice from co-workers and employers as it relates to the filing of U.S. federal tax returns while serving overseas either in the military or as an employee of an American or foreign company.

Service Personnel

Service personnel are adviced to delay filing tax returns while serving overseas in a combat zone until they return. We believe that this is bad advice because the family members may need the refund for an emergency and the government is getting to use the service member's refund until the required tax return is filed.

U.S. Government Employees

We also found that U.S. government employees mistakenly believe that the tax code provisions that apply to military personnel or U.S. citizens working overseas also apply to them since they were working overseas. None of their wages are exempt from federal and state income taxes because salaries are received directly or indirectly from governmental agencies.

U.S. Citizens Working Overseas

A U.S. citizen working overseas could file a form 2555, Foreign Earned Income, to exclude a portion of their income in a tax year, if they met the bona fide residence or physical presence test. See the table below for the exclusion amounts. Living overseas continually for at least 330 days consecutively (this time could be in two different tax years) qualifies you for the exclusion if you file a form 2350, Application for Extension of Time to File U.S Income Tax Return. The exclusion is generally recognized by your home state and offers the same exclusion of income. However, the tax code for your state needs to be consulted prior to going overseas. For example, the State of Georgia recognizes the exlusion; however, the State of Alabama does not.

Income Exclusion by tax year

Tax Year	Income Exclusion	Qualified Housing Expense*
2021	$108,700	$15,218
2022	$112,000	$15,680
2023	$120,000	$16,800

U.S. Citizens Working Overseas

*The qualified housing expense represents 14% of the income exclusion. This rate can be exceeded if residing in certain high-cost areas listed in IRS publications.

Bona Fide Residence

An individual does not automatically acquire bona fide residence status by living in a foreign country or countries for one year. To be a bona fide resident, you must be able to show the IRS that you have been a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. This status is determined on a case-by-case basis as shown on form 2555. Generally, you have to have a work visa and live on the local economy.

Qualified Housing Expenses

Qualified housing expenses have to be reasonable and incurred in the current tax year for housing expenses. Housing expenses include rent or the fair market value of employer provided in-kind by your employer, utilities, real and personal property insurance, rental of furniture and accessories, repairs, and residential. Telephone expenses are not an allowable housing expense.

Exceptions to the Rules

There are exceptions to meeting the rules for physical presence and bona fide residence tests. The requirements can be waived if you can show that you had to leave your tax home because of war, civil unrest, or similar adverse conditions in the foreign country. Furthermore, the physical presence and bona fide residence tests cannot be met if you are residing in a foreign country where U.S. travel restrictions are in effect.

Unfortunately, many U.S. citizens believe that all of their overseas income is tax free, resulting in failure to file, underpayment penalties, and interest on delinquent tax balance due to federal and state government until filed and paid.