If All My Income is From the US, Can the Physical Presence Test Reduce My Taxes?

David McKeegan, Co-Founder of Greenback Expat Tax Services provides answers to a common question about US taxes and the implications for American expats whose income comes solely from the US. This transcript includes updates on information relevant to the 2013 and 2014 tax years.


Hi everybody, I’m David McKeegan with Greenback Expat Tax Services and our question this week is, “If all of my income is from the US, but I live abroad, how does this impact my US taxes?”  The short answer is that as long as you’re living abroad, as long as you meet either IRS exceptions, the Bona Fide Resident Test or the Physical Presence Test, you will qualify for the Foreign Tax Credit and the Foreign Earned Income Exclusion.  For 2012, you’ll be able to exclude the $95,100.  For the 2013 tax year that goes up to $97,600 from your income (and rises to $99,200 in 2014)

What I will warn people about is that if you are self-employed, if you’re a contractor or if you run your own business that’s based in the US, that sort of thing, you will still need to pay self-employment tax.  We have another video on self-employment tax.  You should just budget.  That’s going to be about 15.3% on the first $113,000 that you earn.  Just keep that in mind if you’re self-employed, if you’re a contractor while you’re working overseas.  That’s all.  If you have any questions, please have a look at our website, GreenbackTaxServices.com, and feel free to get in touch with us about your US taxes.  Thank you very much.

Need More Information on the Physical Presence Test?

For information on the Bona Fide Residence Test or the Physical Presence Test, you can refer to our blog posts. If you would like help with your US taxes, please contact us.

Do you know 10 most common mistakes expats make?

  • Eric Fitzsimmons


    First I would like to say great website. I looked at others, but this site has the most information and is published/organized wonderfully.

    I have no interest in doing my own taxes and am glad you do!

    My wife and I, my wife being a Phillipine resident and a US resident, plan on early retirement to the Philippines starting in 2014. We will buy a house there.

    All of our income is from either withdrawals from IRA and income from passive intestments and rentals.

    Our budget/hopes look like this:

    IRA withdrawals 30,0000 per year
    Stocks Divs 5,000 per year
    Bonds 2,000 per year
    Rental 3,000 (assume net from 1099)

    It looks like what you are saying from above (and I think I DO have this wrong), is I don’t pay Federal taxes because it is under the 97,600 limit.

    I am sure I am confused.


    • Greenback

      Hello Eric,

      Thank you for contacting Greenback Expat Tax Services, we are so glad you are enjoying the website!

      With regards to your message, unfortunately the sources of income you have listed are all considered “unearned” income, and thus not able to be excluded by the FEIE (things like salary are considered “earned” and able to be excluded).

      The taxation of the income in the IRA will depend on the type of IRA – traditional vs Roth – if it’s a Roth then its tax free, if it’s a traditional then it will be taxable (assuming there was a tax deduction when you made the contributions).

      The bonds and dividends will be taxable, and the rental property will be as well (however you may have some depreciation there to offset the income).

      Fortunately, you are still able to use a Foreign Tax Credit if you are being taxed on this income in the Philippines. I have privately messaged you some more details, however if you need anything additional please email me at info(at)greenbacktaxservices.com.

      Thanks again!