If you live and work abroad, you may qualify to exclude all or part of
your foreign earned income from United States tax. Foreign earned income is
defined as pay, such as wages, salaries, and professional fees, for personal
services performed in a foreign country during the time your tax home is in
a foreign country and you meet either the bona fide residence test or the
physical presence test. The place where you perform the services is what defines
your income as foreign, not where or how you are paid. For instance, income
received for personal services performed in France is foreign earned income,
even if the employer is American and your pay is deposited in an American
bank. Wages paid by the U.S. government to its employees are not eligible
for the exclusion. However, amounts paid to independent contractors by the
U.S. government may be eligible for the exclusion.
Foreign earned income does not include such items as interest, dividends,
pensions, annuities, or amounts attributable to certain employee trusts. If
you are self-employed, and both capital investment and personal services
are factors in producing your income, your earned income is the smaller of
the value of your personal services or 30% of net profits. Additional rules
are described in Publication 54 (PDF), Tax Guide for U.S. Citizens and Resident
Aliens Abroad.
Your net self-employment income is generally subject to self-employment
tax even if it is excluded for income tax purposes. However, if it was earned
in a country that has a social security agreement with the United States (called
a totalization agreement) it may be exempt from U.S. social security taxes,
including the self-employment tax.
If you violate U.S. restrictions that prohibit travel to certain countries,
your foreign earned income from such a country does not qualify for exclusion.
Refer to Publication 54, Tax Guide For U.S. Citizens and Resident
Aliens Abroad for current travel restrictions. For more information,
refer to Tax Topic 853Tax Topic 854, or Publication
54.
If the information you need relating to this topic is not addressed in Publication
54, you may call the IRS National Office hotline. The number is (215)
516-2000. This is not a toll-free number.
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