Department of the Treasury

Internal Revenue Service

Publication 593

(Rev. January 2007)

Cat. No. 46595Q

Tax Highlights

for U.S. Citizens

and Residents

Going Abroad

Get forms and other information

faster and easier by:

Internet • www.irs.gov
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. 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 be able to claim a tax credit or an itemized

deduction on your U.S. return 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.

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

Page 2 Publication 593 (January 2007)
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 alien,

and on the regular due date of your return:

• 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

• 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. Income Tax Return, with

the Internal Revenue Service Center in Austin, TX 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.

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

Publication 593 (January 2007) Page 3
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

Estate Tax Group

SE:S:SP:IN:T1:1114

1111 Constitution Ave. NW, LE-4435

Washington, DC 20224.

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

a limited amount of your housing costs if your costs are

more than a 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,

• 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

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.

Page 4 Publication 593 (January 2007)
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 and the Antarctic region

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.)

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 September 20, 2004, these travel restrictions

apply only to Cuba. However, if you performed services

at the U.S. Naval Base at Guantanamo Bay, these travel

restrictions do not apply.

Publication 593 (January 2007) Page 5
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

2006 tax year, you can exclude up to $82,400 of your

foreign earned income. The maximum amount you can

exclude is adjusted annually 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.

Your housing amount is the excess, if any, of your

allowable housing expenses for the year over a base

amount. The amount of allowable housing expenses is

limited.

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 allowable 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.

Your allowable housing expenses are limited to a

percentage of the maximum foreign earned income exclusion amount (discussed earlier under Amount excludable), 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 percentage may

Page 6 Publication 593 (January 2007)
vary depending on the foreign country where your tax

home is located. For more information, see the Instructions for Form 2555.

The base amount is 16% of the maximum foreign

earned income exclusion amount, 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.

You figure the limit on housing expenses and the

base amount on Form 2555.

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

entire housing amount from income if it is 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

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.

Publication 593 (January 2007) Page 7
Married couples. If both you and your spouse are

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

54.

Tax on income not excluded. If you claim the foreign

earned income exclusion, the housing exclusion, or both,

you must figure the tax on your nonexcluded income

using the tax rates that would have applied had you not

claimed the exclusions. See the instructions for Form

1040 and complete the Foreign Earned Income Tax

Worksheet. When figuring your alternative minimum tax

on Form 6251, use the Foreign Earned Income Tax

Worksheet in the instructions for Form 6251.

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 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

Page 8 Publication 593 (January 2007)
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.

If you qualify for the foreign earned income or

housing exclusions, see Publication 505 to esti- CAUTION mate your tax liability.

!

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, you can claim a credit or take a deduction

for foreign income tax you pay. 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 claim a credit for foreign

taxes, you generally must complete Form 1116, Foreign

Tax Credit (Individual, Estate, or Trust), 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.

Publication 593 (January 2007) Page 9
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

If you live outside the United States, you can get help

from the IRS in several ways.

Page 10 Publication 593 (January 2007)
You can send your order for forms, instructions,

and publications to the address below and receive a response within 10 business days after

your request is received.

National Distribution Center

P.O. Box 8903

Bloomington, IL 61702-8903

For answers to technical or account questions, you can

write 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.

Call your nearest U.S. Embassy or consulate to find out

when and where assistance will be available.

In addition, the IRS has full-time permanent staff in 3

U.S. Embassies and consulates. These offices have tax

forms and publications and can answer your federal

income tax questions, assist with the preparation of current and prior year tax returns, help with account

problems, and answer your questions about notices and

bills. You can reach these offices at the following telephone numbers. The country and city/area codes are

provided for taxpayers dialing from outside the country

listed.

Frankfurt, Germany (49) (69) 7535-3834

Monday–Friday, 9:00 a.m. – 3:00 p.m. CET

London, England (44) (20) 7894-0477

Monday–Friday, 9:00 a.m. – Noon GMT

Paris, France (33) (1) 4312-2555

Monday–Friday, 1:30 p.m. – 3:30 p.m. CET

Note. These are the locations, numbers, and hours

of operation in effect on January 1, 2007.

Publication 593 (January 2007) Page 11