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Offshore update, part 2: Can Uncle Sam tax foreign earnings?

In the first part of this post, we sketched the evolving compliance landscape for offshore accounts and income. With the Foreign Account Tax Compliance Act (FATCA) taking effect, U.S. account holders with foreign assets find themselves under more scrutiny than ever before.

In this part of the post, let's look at an aspect of offshore compliance that is often overlooked: the foreign earned income exclusion.

The requirement to report foreign accounts to the IRS generally kicks in with accounts valued at $10,000. The form for making the filing has historically been called the FBAR, for Report of Foreign and Financial Accounts. A more recent alternative name is FinCEN Form 114.

But what if you don't have a foreign account of that magnitude, but do work abroad? Can Uncle Sam tax you on your foreign earnings?

The answer is that the U.S. does assert the right to tax its citizens and lawful permanent residents on income they earn anywhere in the world. The U.S. is virtually alone among the countries of the world in making this broad assertion.

There is, however, an important limitation on this broad taxing authority. The foreign earned income exclusion allows U.S. taxpayers who meet the criteria to keep a certain amount of their foreign earnings from being taxed by the U.S.

The exact amount that can be excluded varies somewhat from year to year. In 2013, it was $97,600, up from $95,100 in 2012.

Keep in mind, too, if you work abroad, that you may also be able to deduct or exclude qualifying housing expenses.

Source: IRS.gov, "Foreign Earned Income Exclusion"

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