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Publication 54 - Introductory Material

Table of Contents

What's New

Exclusion amount. The maximum foreign earned income exclusion is now adjusted annually for inflation. For 2007, the maximum exclusion has increased to $85,700. See Limit on Excludable Amount under Foreign Earned Income Exclusion in chapter 4.

Housing expenses—base amount. The computation of the base housing amount (line 32 of Form 2555) is tied to the maximum foreign earned income exclusion. The amount is 16 percent of the exclusion amount (computed on a daily basis), multiplied by the number of days in your qualifying period that fall within your 2007 tax year. For 2007, this amount is $37.57 per day ($13,712 per year). See Housing Amount under Foreign Housing Exclusion and Deduction in Chapter 4.

Housing expenses—maximum amount. The amount of qualified housing expenses eligible for the housing exclusion and housing deduction has changed for many locations. See Limit on housing expenses under Foreign Housing Exclusion and Deduction in chapter 4.

Exemption amount. The amount you can deduct for each exemption (based on your filing status and adjusted gross income) is at least $1,133 but not more than $3,400.

Exemption phaseout. You lose part of the benefit of your exemptions if your adjusted gross income is above a certain amount. The amount at which the phaseout begins depends on your filing status. For 2007, the phaseout begins at:

  • $117,300 for married persons filing separately,

  • $156,400 for single individuals,

  • $195,500 for heads of household, and

  • $234,600 for married persons filing jointly or qualifying widow(er)s.

However, you can lose no more than ⅔ of the amount of your exemptions. In other words, each exemption cannot be reduced to less than $1,133.

Standard deduction. The standard deduction for people who do not itemize deductions on Schedule A (Form 1040) is, in most cases, higher for 2007. The amount depends on your filing status, whether you are 65 or older or blind, and whether an exemption can be claimed for you by another person. The amounts for the standard deduction for 2007 are shown in the instructions for your tax return.

Itemized deductions phaseout. If your adjusted gross income is above a certain amount, you may lose part of your itemized deductions. In 2007, this amount has increased to $156,400 ($78,200 if married filing separately). However, the amount by which these deductions are reduced is only 2/3 of the amount of the reduction that otherwise would have applied.

Filing requirements. Generally, the amount of income you can receive before you must file an income tax return has increased. These amounts are shown in chapter 1 under Filing Requirements.

Maximum self-employment tax. For 2007, the maximum amount of net earnings from self-employment that is subject to the social security part of the self-employment tax has increased to $97,500. All net earnings are subject to the Medicare part of the tax. For more information, see chapter 3.

Reminders

Change of address. If you change your mailing address, be sure to notify the Internal Revenue Service using Form 8822, Change of Address. If you are changing both your home and business addresses, you need to complete two forms.

Figuring 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 to figure the amount of tax to enter on Form 1040, line 44. If you must attach Form 6251 to your return, use the Foreign Earned Income Tax Worksheet provided in the instructions for Form 6251.

Photographs of missing children. The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child.

Introduction

This publication discusses special tax rules for U.S. citizens and resident aliens who work abroad or who have income earned in foreign countries. 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 filing requirements that apply to U.S. citizens or resident aliens living in the United States.

Resident alien.   A resident alien is an individual who is not a citizen or national of the United States and who meets either the green card test or the substantial presence test for the calendar year.

  1. Green card test. You are a U.S. resident if you were a lawful permanent resident of the United States at any time during the calendar year. This is known as the green card test because resident aliens hold immigrant visas (also known as green cards).

  2. Substantial presence test. You are considered a U.S. resident if you meet the substantial presence test for the calendar year. To meet this test, you must be physically present in the United States on at least:

    1. 31 days during the current calendar year, and

    2. 183 days during the current year and the 2 preceding years, counting all the days of physical presence in the current year, but only ⅓ the number of days of presence in the first preceding year, and only 1/6 the number of days in the second preceding year.

Example.

You were physically present in the United States on 120 days in each of the years 2005, 2006, and 2007. To determine if you meet the substantial presence test for 2007, count the full 120 days of presence in 2007, 40 days in 2006 (⅓ of 120), and 20 days in 2005 (1/6 of 120). Because the total for the 3-year period is 180 days, you are not considered a resident under the substantial presence test for 2007.

  For more information on resident and nonresident status, the tests for residence, and the exceptions to them, see Publication 519, U.S. Tax Guide for Aliens.

Filing information.   Chapter 1 contains general filing information, such as:

  • Whether you must file a U.S. tax return,

  • When and where to file your return,

  • How to report your income if it is paid in foreign currency,

  • How to treat a nonresident alien spouse as a U.S. resident, and

  • Whether you must pay estimated tax.

Withholding tax.   Chapter 2 discusses the withholding of income, social security, and Medicare taxes from the pay of U.S. citizens and resident aliens.

Self-employment tax.   Chapter 3 discusses who must pay self-employment tax.

Foreign earned income exclusion and housing exclusion and deduction.   Chapter 4 discusses income tax benefits that apply if you meet certain requirements while living abroad. You may qualify to treat up to $85,700 of your income as not taxable by the United States. You may also be able to either deduct part of your housing expenses from your income or treat a limited amount of income used for housing expenses as not taxable by the United States. These benefits are called the foreign earned income exclusion and the foreign housing deduction and exclusion.

  To qualify for either of the exclusions or the deduction, you must have a tax home in a foreign country and earn income from personal services performed in a foreign country. These rules are explained in chapter 4.

  If you are going to exclude or deduct your income as discussed above, you must file Form 2555, Foreign Earned Income, or Form 2555-EZ, Foreign Earned Income Exclusion. You will find an example with filled-in Forms 2555 and 2555-EZ in chapter 4.

Exemptions, deductions, and credits.   Chapter 5 discusses exemptions, deductions, and credits you may be able to claim on your return. These are generally the same as if you were living in the United States. However, if you choose to exclude foreign earned income or housing amounts, you cannot deduct or exclude any item or take a credit for any item that is related to the amounts you exclude. Among the topics discussed in chapter 5 are:

  • Exemptions you can claim,

  • Contributions you can deduct,

  • Moving expenses you can deduct, and

  • Foreign taxes you can either deduct or take a credit for.

Tax treaty benefits.   Chapter 6 discusses some benefits that are common to most tax treaties and explains how to get help if you think you are not receiving a treaty benefit to which you are entitled. It also explains how to get copies of tax treaties.

Expatriates.    Expatriation tax provisions apply to U.S. citizens who have renounced their citizenship and long-term residents who have ended their residency. These provisions are discussed in chapter 4 of Publication 519.

How to get tax help.   Chapter 7 is an explanation of how to get information and assistance from the IRS.

Questions and answers.   Frequently asked questions and answers to those questions are presented in the back of the publication.

Comments and suggestions.   We welcome your comments about this publication and your suggestions for future editions.

  You can write to us at the following address:


Internal Revenue Service
Individual Forms and Publications Branch
SE:W:CAR:MP:T:I
1111 Constitution Ave. NW, IR-6526
Washington, DC 20224

  We respond to many letters by telephone. Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence.

  You can email us at *taxforms@irs.gov. (The asterisk must be included in the address.) Please put “Publications Comment” on the subject line. Although we cannot respond individually to each email, we do appreciate your feedback and will consider your comments as we revise our tax products.

Ordering forms and publications.   Visit www.irs.gov/formspubs to download forms and publications, call 1-800-829-3676, or write to the address below and receive a response within 10 days after your request is received.


National Distribution Center
P.O. Box 8903
Bloomington, IL 61702-8903

Tax questions.   If you have a tax question, check the information available on www.irs.gov or call 1-800-829-1040. We cannot answer tax questions sent to either of the above addresses.

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