Minor Strings Attached
If you earn up to $92,900 in foreign income, you can sigh with relief. In addition, you can exclude or deduct certain foreign housing amounts. and enjoy other benefits.
If you decide to live abroad, following your cash, assets and investments offshore, there's a very helpful provision of US tax law you may be able to use to your financial advantage.
The so-called "foreign earned income exclusion" lets a US citizen who lives and works outside the US to exclude up to $92,900 of foreign earned income from US income taxes. Both you and your spouse can earn a tax free $160,000 annually offshore, plus tax free housing allowances an offshore employer pays. Source - http://www.irs.gov/businesses/small/international/article/0,,id=97130,00.html
This is not a tax deduction, credit, or deferral. It's an outright exclusion of your offshore earnings from gross income, so you pay no US income tax on that amount.
To qualify for these benefits you must:
Confusion over this point stings many Americans overseas. If you work overseas and maintain a US residence, your tax home remains in the US. To qualify for the foreign earned income exclusion you must establish both your principal place of business and your actual residence outside the United States.
A complicated test that determines if you get this exclusion involves counting the maximum number of days you're in or out of the USA. But the foreign residence test is easier for most taxpayers to pass. You must establish yourself as a bona fide resident of a foreign country for an uninterrupted period that includes an entire taxable year; and you must intend to stay there indefinitely. If you don't pass this test, you're considered a transient and wont qualify.
US tax law says your residence is a state of mind. It's where you intend to be domiciled indefinitely. To determine your state of mind, the IRS looks at the degree of your attachment to the country in question. A number of factors, none of them decisive, are examined. The bottom line; you must establish clearly yourself as a member of a foreign community.
This unusual tax break is only for those who live and earn offshore. If you need expert advice on this and other offshore tax matters, contact email@example.com We can even suggest the best tax-free places to live and work.