Annual Adjustments by the IRS Help US Expats Minimize Foreign Income Tax
The IRS recently announced the annual inflation adjustments for tax year 2013, which will impact not only taxpayers living in the US, but those earning a foreign income working overseas. Americans living abroad will want to take note of these changes as they plan their foreign income deductions and witholdings for the year to come. In particular:
- For taxable years beginning in 2013, the Foreign Earned Income Exclusion amount is $97,600 (up from $95,100 for 2012), which also impacts other exclusions and credits on foreign income earned by taxpayers living abroad.
- The Alternative Minimum Tax exemption amount for tax year 2013 is $51,900 ($80,800, for married couples filing jointly), set by the American Taxpayer Relief Act of 2012, which indexes future amounts for inflation. The 2012 exemption amount was $50,600 ($78,750 for married couples filing jointly).
- The American Taxpayer Relief Act of 2012 added a limitation for itemized deductions claimed on 2013 returns of individuals with incomes of $250,000 or more ($300,000 for married couples filing jointly).
- The standard deduction rises to $6,100 ($12,200 for married couples filing jointly), up from $5,950 ($11,900 for married couples filing jointly) for tax year 2012.
The Foreign Earned Income Exclusion
In order to qualify for the Foreign Earned Income Exclusion:
- You must have earned foreign income
- Your tax home must be in a foreign country
- You must have passed the Bona Fide Residence Test or the Physical Presence Test
Please note that this increase will likely have an impact on the amount you claim for your Foreign Housing Allowance. With it, the IRS offers a deduction for a part of your foreign housing expense based on where you live and how many days you live outside the US. You can deduct up to 30% of the Foreign Earned Income Exclusion as part of your Foreign Housing Deduction on your US expat taxes. In other words, you are allowed to deduct a maximum of $29,280 for your housing expenses in 2013 ($97,600 x .30 = $29,280). The amount is not the same for every expat; the IRS makes some adjustments in this limit for expats living overseas in more than 400 geographic locations that they list in a table on their website.
Questions About Foreign Income?
If you plan on living overseas, it is important to plan now to minimize the US taxes you will owe on the foreign income you earn. If you have any questions about your US expat taxes, please contact our expat tax experts.