U.S. citizens or resident aliens are subject to income tax on their worldwide income. If they are living or traveling outside the United States, they are required to file income tax returns, estate tax returns, and gift tax returns and pay estimated tax in the same way as those residing in the United States. The filing requirement threshold is the same, as shown above. However, they may be eligible to claim the foreign earned income/housing exclusion if they satisfy both bona fide foreign residence tests or the foreign physical presence test.
If the taxpayer claims the foreign earned income exclusion, housing exclusion, or housing deduction on Form 2555 or 2555-EZ, he must figure his tax using the Foreign Earned Income Tax Worksheet.
If the taxpayer does not claim the foreign housing exclusion but otherwise qualifies, he can claim the foreign earned income exclusion using Form 2555-EZ.
The maximum foreign earned income exclusion for the tax year 2019 is $105,900 to offset inflation. The maximum amount of foreign housing expenses allowed for 2019 is $31,770.
Taxpayers may also be eligible to claim a foreign tax credit* for the income tax paid to the foreign countries. They may also be subject to the FBAR filing requirements.
A nonrefundable credit is taken on the U.S. tax return for taxes paid to a foreign country or U.S. possession.
John is a U.S. citizen and lived in Japan in the tax year 2019. He had W-2 wages of $125,000 from a Japanese company and an interest income of $2,580 from a bank in the United States. John is required to file a federal tax return; however, he may exclude $105,900 of his foreign income from his gross income by filing Form 2555 or 2555-EZ if he otherwise qualifies.