Tax Consequences of Money Earned Overseas

By Kolonji Murray

2014.07.22 Overseas-Tax-Return

Young professionals who pursue work outside of the US should realize that all of the income they earn both domestically and internationally is taxed and reportable to the IRS., as well as the state they live in if it normally collects income tax. However, the federal and state tax codes do allow foreign working professionals, under very specific circumstances, to exclude a certain portion of their foreign earned income from being taxed as long as it’s reported to the IRS. In 2014 the amount of foreign earned income that is excluded from being taxed under specific circumstances is $99,200.

So how does this work in real dollar terms?

Let’s say a young professional gets a promotion that sends them overseas to work in China for a full year. While working in China they earn $175,000 per year and meet all foreign earned income exclusion criteria. Using IRS form 2255 they would subtract $99,200 from the $175,000 income. Therefore, only $75,800 is reported as being taxable.

If that same professional makes less than the $99,200 for 2014, all of their income would be excluded from being taxed and reported at the federal level. New York State nonresident filers would use form IT 203 line 16 to report their excluded income at the state level.

So what are the specific circumstances where their income is excluded from being taxed?

The IRS says the following:

To qualify for the foreign earned income exclusion, a U.S. citizen or resident alien must:

They also say that the following income is not allowed to be excluded from taxation:

  • Pay received as a military or civilian employee of the U.S. Government or any of its agencies
  • Pay for services conducted in international waters (not a foreign country)
  • Pay in specific combat zones, as designated by an Executive Order from the President, that is excludable from income
  • Payments received after the end of the tax year following the year in which the services that earned the income were performed
  • The value of meals and lodging that are excluded from income because it was furnished for the convenience of the employer
  • Pension or annuity payments, including social security benefits

Any young professionals who are not certain how to determine what income is taxable, non-taxable, or excluded,should meet with a qualified tax advisor to make sure they not only avoid problems with the IRS, but also take advantage of the credits, deductions and exclusion available to them.

For more information on foreign earned income from the IRS, readers can look at the following websites:

http://www.irs.gov/pub/irs-pdf/p54.pdf

http://www.irs.gov/Businesses/Foreign-Earned-Income-Exclusion-1

Kolonji Murray

TaxAssurances, LLC is an independent financial services firm that provides expert advice and solutions in three financial disciplines: Accounting, Insurance and Investment Management.

It’s Founder, Kolonji Murray, has worked as a banker, accountant and financial advisor for a number of leading firms. He holds a degree in Accounting from Hampton University and is active in a number of civic and industry organizations. Along with being an Accountant Mr. Murray is Series 7 and 66 licensed in NY. He is also life, accident and health, variable life/variable annuities insurance licensed.

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