Department of the Treasury

Internal Revenue Service

Publication 593

(Rev. January 2006)

Cat. No. 46595Q

Tax Highlights

for U.S. Citizens

and Residents

Going Abroad
Introduction

This publication discusses in general terms some provisions of U.S. federal income tax law that apply to U.S.

citizens and resident aliens who live or work abroad and

who expect to receive income from foreign sources.

As a U.S. citizen or resident alien, your worldwide

income generally is subject to U.S. income tax regardless of where you are living. Also, you are subject to the

same income tax return filing requirements that apply to

U.S. citizens or residents living in the United States.

However, several income tax benefits might apply if

you meet certain requirements while living abroad. You

may be able to exclude from your income a limited

amount of your foreign earned income. You also may be

able either to exclude or to deduct from gross income

your housing amount (defined later). To claim these

benefits, you must file a tax return and attach Form 2555,

Foreign Earned Income. If you are claiming the foreign

earned income exclusion only, you may be able to use

the shorter Form 2555-EZ, Foreign Earned Income Exclusion, rather than Form 2555.

You may, on your U.S. return, be able to claim a tax

credit or an itemized deduction for the foreign income

taxes that you pay. Also, under tax treaties or conventions that the United States has with many foreign countries, you may be able to reduce your foreign tax liability.

Publications 54, Tax Guide for U.S. Citizens and

Resident Aliens Abroad; 514, Foreign Tax Credit for

Individuals; and 901, U.S. Tax Treaties, discuss in detail

the treatment of your foreign income, the foreign tax

credit, and the general tax treaty benefits available to

you.

See How To Get Tax Help at the end of this publication for information about getting publications and forms.

Filing Information

The U.S. filing requirements for U.S. citizens and resident aliens in foreign countries are generally the same as

those for citizens and residents living in the United

States.

Who must file. Your age, filing status, gross income,

and whether you can be claimed as a dependent by

another taxpayer determine whether you must file a U.S.

federal income tax return. To determine if you meet the

gross income requirement for filing purposes, you must

include all income you receive from foreign sources as

well as your U.S. income. This is true even if:

• The income is paid in foreign money,

• The foreign country imposes an income tax on that

income, or

• The income is excludable under the foreign earned

income exclusion, discussed later.

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Self-employed persons. You must file a U.S. income tax return if you had $400 or more of net earnings

from self-employment, regardless of your age. Net earnings from self-employment include income earned both

in a foreign country and in the United States.

You must pay self-employment tax on your self-employment income even if it is earned in a foreign country

and is excludable as foreign earned income in figuring

your income tax.

When to file. If your tax year is the calendar year, the

due date for filing your income tax return is usually April

15 of the following year.

Extensions of time to file. You are automatically

granted an extension to June 15 to file your return and

pay any tax due if you are a U.S. citizen or resident, and

on the regular due date of your return:

1. You are living outside of the United States and

Puerto Rico, and your main place of business or

post of duty is outside of the United States and

Puerto Rico, or

2. You are in military or naval service on duty outside

the United States and Puerto Rico.

You must pay interest on any unpaid tax from the regular

due date to the date you pay the tax.

You do not have to file a special form to receive this

extension. You must, however, attach a statement to

your tax return explaining what situation qualified you for

the extension.

It may benefit you to file for an additional extension of

time to file. You may benefit if, on the due date for filing,

you have not yet met either the bona fide residence test

or the physical presence test, but you expect to qualify

after the automatic extension discussed above. To obtain

an additional extension, file Form 2350, Application for

Extension of Time To File U.S. Individual Income Tax

Return, with the Internal Revenue Service Center in

Philadelphia or your local IRS representative. You must

file Form 2350 after the close of your tax year but before

the end of the first extension. If an additional extension is

granted, it will be to a date after you expect to meet the

time requirements for the bona fide residence or the

physical presence test.

Where to file. If any of the following situations apply to

you, you should file your return with the Internal Revenue

Service Center, Austin, TX 73301-0215.

• You claim the foreign earned income exclusion.

• You claim the foreign housing exclusion or deduction.

• You use an APO or FPO address.

• You live in a foreign country or are a resident, for

tax purposes, of a foreign country.

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All other taxpayers should see Publication 54 or the

instructions for Form 1040.

Foreign bank and financial accounts. If you had any

financial interest in, or signature or other authority over a

bank account, securities account, or other financial account in a foreign country at any time during the tax year,

you may have to complete Treasury Department Form

TD F 90-22.1, Report of Foreign Bank and Financial

Accounts and file it with the Department of the Treasury

at the address listed on the form. You need not file this

form if the combined assets in the account(s) are

$10,000 or less during the entire year, or if the assets are

with a U.S. military banking facility operated by a U.S.

financial institution.

You can get Form TD F 90-22.1 from the offices listed

at the end of this publication or through the IRS website

at www.irs.gov.

Estate and gift taxes. Under certain conditions, you

may have to file a federal estate or gift tax return. For

more information, see Publication 950, Introduction to

Estate and Gift Taxes.

You can also request additional information by

writing to:

Internal Revenue Service

International Estate Tax

1111 Constitution Ave. NW – LE-4435

Washington, DC 20024.

Income Earned Abroad

You may qualify for an exclusion from tax of a limited

amount of income earned while working abroad. However, you must file a tax return to claim it. In general,

foreign earned income is income received for services

you perform in a foreign country. You also may be able to

claim an exclusion or a deduction from gross income for

your reasonable housing costs that are over a certain

base amount. Generally, you will qualify for these benefits if your tax home (defined later) is in a foreign country,

or countries, throughout your period of bona fide foreign

residence or physical presence and you are one of the

following:

• A U.S. citizen who is a bona fide resident of a

foreign country or countries for an uninterrupted

period that includes an entire tax year, or

• A U.S. resident alien who is a citizen or national of

a country with which the United States has an

income tax treaty in effect and who is a bona fide

resident of a foreign country or countries for an

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uninterrupted period that includes an entire tax

year, or

• A U.S. citizen or a U.S. resident alien who is physically present in a foreign country or countries for at

least 330 full days during any period of 12 consecutive months.

Tax home. Your tax home is the general area of your

main place of business, employment, or post of duty

where you are permanently or indefinitely engaged to

work. You are not considered to have a tax home in a

foreign country for any period during which your abode is

in the United States. However, being temporarily present

in the United States, or maintaining a dwelling there,

does not necessarily mean that your abode is in the

United States. For details, see Publication 54.

Foreign country. A foreign country, for this purpose,

means any territory under the sovereignty of a government other than that of the United States, including

territorial waters (determined under U.S. laws) and air

space. A foreign country also includes the seabed and

subsoil of those submarine areas which are adjacent to

the territorial waters of the foreign country and over

which it has exclusive rights under international law to

explore and exploit natural resources. For this purpose,

U.S. possessions or territories are not foreign countries.

Waiver of time requirements. You may not have to

meet the minimum time requirements for bona fide residence or physical presence if you have to leave the

foreign country because war, civil unrest, or similar adverse conditions in the country prevented you from conducting normal business. You must, however, be able to

show that you reasonably could have expected to meet

the minimum time requirements if the adverse conditions

had not occurred.

A list of countries qualifying for the waiver is published

in the Internal Revenue Bulletin (IRB). You can read the

IRB on the Internet at www.irs.gov. Or, you can get a

copy of the list by writing to :

Internal Revenue Service

International Section

P.O. Box 920

Bensalem, PA 19020-8518

Travel restrictions. If you violate U.S. travel restrictions, you will not be treated as being a bona fide resident

of, or physically present in, a foreign country for any day

during which you are present in a country in violation of

the restrictions. (These restrictions generally prohibit

U.S. citizens and residents from engaging in transactions

related to travel to, from, or within certain countries.)

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Also, income that you earn from sources within such a

country for services performed during a period of travel

restrictions does not qualify as foreign earned income.

Housing expenses that you incur within that country (or

outside that country for housing your spouse or dependents) while you are in violation of travel restrictions

cannot be included in figuring your foreign housing

amount.

As of January 1, 2006, these travel restrictions apply

only to Cuba.

Exclusion of foreign earned income. If your tax

home is in a foreign country and you meet either the bona

fide residence test or the physical presence test, you can

choose to exclude from gross income a limited amount of

your foreign earned income. Your income must be for

services performed in a foreign country during your period of foreign residence or presence, whichever applies.

You cannot, however, exclude the pay you receive as an

employee of the U.S. Government or its agencies.

Credits and deductions. If you claim the exclusion,

you cannot claim any credits or deductions that are

related to the excluded income. Thus, you cannot claim a

foreign tax credit or deduction for any foreign income tax

paid on the excluded income. Nor can you claim the

earned income credit if you claim the exclusion. Also, for

IRA purposes, the excluded income is not considered

compensation and, for figuring deductible contributions

when you are covered by an employer retirement plan,

the excluded income is included in your modified adjusted gross income.

Amount excludable. If your tax home is in a foreign

country and you qualify under either the bona fide residence test or the physical presence test for the entire tax

year, you can exclude up to $80,000 of your foreign

income earned during the year. Beginning in 2008, the

$80,000 amount will be adjusted for inflation.

If you qualify under either test for only part of the year,

you must reduce ratably the maximum amount based on

the number of days within the tax year you qualified

under one of the two tests.

Housing amount. If your tax home is in a foreign

country and you meet either the bona fide residence test

or the physical presence test, you may be able to claim

an exclusion or a deduction from gross income for a

housing amount.

A housing amount is the excess, if any, of your allowable housing expenses for the tax year over a base

amount. Allowable housing expenses are the reasonable

expenses (such as rent, utilities other than telephone

charges, and real and personal property insurance) paid

or incurred during the tax year by you, or on your behalf,

for your foreign housing and that of your spouse and

dependents if they lived with you. You can include the

rental value of housing provided by your employer in

return for your services. You can also include the allowaPage 6
ble housing expenses of a second foreign household for

your spouse and dependents if they did not live with you

because of dangerous, unhealthy, or otherwise adverse

living conditions at your tax home. Allowable housing

expenses do not include the cost of home purchase or

other capital items, wages of domestic servants, or deductible interest and taxes.

The base amount is 16% of the annual salary of a

GS-14, step 1, U.S. Government employee, figured on a

daily basis, times the number of days during the year that

you meet the bona fide residence test or the physical

presence test. The annual salary is determined on January 1 of the year in which your tax year begins. You figure

the base amount on Form 2555.

Exclusion. You can exclude (up to the limits) your

entire housing amount from income if it is considered

paid for with employer-provided amounts. Employer-provided amounts are any amounts paid to or for you by your

employer, including your salary, housing reimbursements, and the fair market value of pay given in the form

of goods and services. If you have no self-employment

income, your entire housing amount is considered paid

for with employer-provided amounts.

If you claim the exclusion, you cannot claim any

credits or deductions related to excluded income, including a credit or deduction for any foreign income tax paid

on the excluded income.

Deduction. If you are self-employed and your housing amount is not provided by an employer, you can

deduct it in arriving at your adjusted gross income. However, the deduction cannot be more than your foreign

earned income for the tax year minus the total of your

excluded foreign earned income plus your housing exclusion.

Carryover. If you cannot deduct all of your housing

amount in a tax year because of the limit, you can carry

over the unused part to the following year only. If you

cannot deduct it in the following year, you cannot carry it

over to any other year. You deduct the carryover in

figuring adjusted gross income. The amount of carryover

you can deduct is limited to your foreign earned income

for the year of the carryover minus the total of your

foreign earned income exclusion, housing exclusion, and

housing deduction for that year.

Choosing the exclusion(s). You make separate

choices to exclude foreign earned income and/or to exclude or deduct your foreign housing amount. If you

choose to take both the foreign housing exclusion and

the foreign earned income exclusion, you must figure

your foreign housing exclusion first. Your foreign earned

income exclusion is then limited to the smaller of (a) your

annual exclusion limit or (b) the excess of your foreign

earned income over your foreign housing exclusion.

Once you choose to exclude your foreign earned

income or housing amount, that choice remains in effect

for that year and all future years unless you revoke it. You

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can revoke your choice for any tax year. However, if you

revoke your choice for a tax year, you cannot claim the

exclusion again for your next 5 tax years without the

approval of the IRS. For more information on revoking

the exclusion, see chapter 4 of Publication 54.

Married couples. If both you and your spouse are

eligible for the exclusion(s), see chapter 4 of Publication

54.

Exclusion of employer-provided meals and lodging.

If as a condition of employment you are required to live in

a camp in a foreign country that is provided by or for your

employer, you can exclude the value of any meals and

lodging furnished to you, your spouse, and your dependents. For this exclusion, a camp is lodging that is:

• Provided for your employer’s convenience because

the place where you work is in a remote area

where satisfactory housing is not available to you

on the open market within a reasonable commuting

distance,

• Located as close as practicable in the area where

you work, and

• Provided in a common area or enclave that is not

available to the public for lodging or accommodations and that normally houses at least 10 employees.

Tax Withholding

and Estimated Tax

Generally, you must pay U.S. tax on income earned

abroad in the same way you pay the tax on income

earned in the United States. If you are an employee of a

U.S. company, your employer probably withholds income tax from your pay. If income tax is not withheld or if

not enough tax is withheld, you might have to pay estimated tax.

Withholding tax. You may be able to have your employer discontinue withholding income tax from all or a

part of your wages. You can do this if you expect to

qualify for the income exclusions under either the bona

fide residence test or the physical presence test. See

Publication 54 for information.

Withholding from pension payments. U.S. payers

of benefits from employer deferred compensation plans

(such as employer pension, annuity, or profit-sharing

plans), individual retirement plans, and commercial annuities generally must withhold income tax from the payments or distributions. Withholding will apply unless you

choose exemption from withholding. You cannot choose

exemption unless you provide the payer of the benefits

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with a residence address in the United States or a U.S.

possession or unless you certify to the payer that you are

not a U.S. citizen or resident alien or someone who left

the United States to avoid tax.

For rules that apply to nonperiodic distributions from

qualified employer plans and tax-sheltered annuity

plans, get Publication 575, Pension and Annuity Income.

Estimated tax. Because foreign employers generally

do not withhold U.S. tax from your wages, you may have

to pay estimated tax if you are working abroad for a

foreign employer. Your estimated tax is the total of your

estimated income tax and self-employment tax for the

year minus your expected withholding for the year.

When you estimate your gross income, do not include

the income that you expect to exclude. You can subtract

from income your estimated housing deduction in figuring your estimated tax liability. However, if the actual

exclusion or deduction is less than you expected, you

may be subject to a penalty on the underpayment.

Use Form 1040-ES, Estimated Tax for Individuals, to

estimate your tax. The requirements for filing and paying

estimated tax are generally the same as those you would

follow if you were in the United States.

Foreign Income Taxes

In some cases, foreign income tax you pay can be

credited against your U.S. tax liability or deducted in

figuring taxable income on your U.S. income tax return. It

is usually to your advantage to claim a credit for foreign

taxes rather than to deduct them. A credit reduces your

U.S. tax liability, and any excess can be carried back and

carried forward to other years. A deduction only reduces

your taxable income and can be taken only in the current

year. You generally cannot deduct some foreign income

taxes and take a credit for others.

Tax credit. If you choose to credit foreign taxes against

your tax liability, you generally must complete Form

1116, Foreign Tax Credit (Individual, Estate, Trust, or

Nonresident Alien Individual), and attach it to your U.S.

income tax return. Do not include the foreign taxes paid

or accrued as withheld income taxes on Form 1040.

Limit. Your credit cannot be more than the part of

your U.S. income tax liability based on your taxable

income from sources outside the United States. So, if

you have no U.S. income tax liability, or if all your foreign

income is excludable, you will not be able to claim a

foreign tax credit.

If the foreign taxes you paid or incurred during the

year are more than the limit on your credit for the current

year, you can carry back the unused foreign taxes as

credits to the previous tax year and then carry forward

any remaining unused foreign taxes to the next 10 tax

years.

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You will not be subject to this limit and may be

able to claim the credit without using Form 1116

if the following requirements are met.

TIP

• You are an individual.

• Your only foreign source income for the tax year is

passive income (dividends, interest, royalties, etc.)

that is reported to you on a payee statement (such

as a Form 1099-DIV or 1099-INT).

• Your qualified foreign taxes for the tax year are not

more than $300 ($600 if filing a joint return) and

are reported on a payee statement.

• You elect this procedure for the tax year.

If you make this election, you cannot carry back

or carry over any unused foreign tax to or from CAUTION this tax year.

!

Foreign taxes paid on excluded income. You cannot claim a credit for foreign taxes paid on amounts

excluded from gross income under the foreign earned

income exclusion or the housing amount exclusion, discussed earlier.

Deduction. If you choose to deduct all foreign income

taxes on your U.S. income tax return, itemize the deduction on Schedule A (Form 1040). You cannot deduct

foreign taxes paid on income you exclude from your U.S.

income tax return.

More information. The foreign tax credit and deduction, their limits, and the carryback and carryover provisions are discussed in detail in Publication 514.

Tax Treaty Benefits

U.S. tax treaties or conventions with many foreign countries entitle U.S. residents to certain credits, deductions,

exemptions, and reduced foreign tax rates. In this way,

you may be able to pay less tax to those countries.

For example, most tax treaties allow U.S. residents to

exempt part or all of their income for personal services

from the treaty country’s income tax if they are in the

treaty country for a limited number of days.

Treaties also generally provide U.S. students, teachers, and trainees with special exemptions from the foreign treaty country’s income tax. Publication 901

contains detailed information on tax treaties and tells you

where you can get copies of them.

How To Get Tax Help

You can get help from the IRS in several ways. The IRS

has combined special forms and instructions as well as

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Publication 54 in Package 1040-7 for U.S. citizens and

residents living abroad.

You can get the package and additional assistance by writing to:

Internal Revenue Service

International Section

P.O. Box 920

Bensalem, PA 19020–8518

During the filing period, you can also get the necessary federal income tax forms and publications from U.S.

embassies and consulates.

You can also call your nearest U.S. embassy or

consulate, or the IRS office numbers listed below, to find out when and where assistance will

be available. These IRS telephone numbers include the

country and city codes required if you are outside the

local dialing area.

London, England (44) (20) 7408–8077

Paris, France (33) (1) 4312–2555

Note. These are the locations and numbers in effect on

January 1, 2006.

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