1. U.S. Government Civilian Employees Working Overseas
If you are a U. S. citizen working for the US Government, including the Foreign Service, and you are stationed abroad, your income tax filing requirements are generally the same as those for citizens and residents living in the United States. You are taxed on your worldwide income, even though you live and work abroad. However, you may receive certain allowances and have certain expenses that you generally do not have while living in the United States.
U.S. Foreign Service Employees
If you are an employee of the US Foreign Service and your position requires you to establish and maintain favorable relations in foreign countries, you may receive a nontaxable allowance for representation expenses. If your expenses are more than the allowance you receive, you can no longer deduct the excess expenses as an itemized deduction. For more information, refer to U.S. Foreign Service Employees.
Foreign Earned Income Exclusion, and Foreign Housing Exclusion and Deduction
Certain taxpayers can exclude or deduct income earned in foreign countries. However, the foreign earned income and housing exclusions and the foreign housing deduction do not apply to the income you receive as an employee of the US Government.
For more information on the foreign earned income and housing exclusions and foreign housing deduction, see Publication 54, Tax Guide for US Citizens and Resident Aliens Abroad.
Allowances, Differentials, and Other Special Pay
Most payments received by US Government civilian employees for working abroad, including pay differentials, are taxable. However, certain foreign areas allowances, cost of living allowances, and travel allowances are tax free. For more information, refer to Allowances, Differentials, and Other Pay.
U.S. Agency Reimbursed By Foreign Country
If you are a US Government employee paid by a US agency to perform services in a foreign country, your pay is from the US Government and does not qualify for the exclusions or the deduction. This is true even if the US agency is reimbursed by the foreign government.
Employees of Post Exchanges, etc.
If you are an employee of an Armed Forces post exchange, officers' and enlisted personnel club, embassy commissary, or similar instrumentality of the US Government, the earnings you receive are paid by the US Government. This is true whether they are paid from appropriated or non-appropriated funds. These earnings are not eligible for the foreign earned income and housing exclusions or the foreign housing deduction.
No Miscellaneous Itemized Deductions Allowed
You can no longer deduct unreimbursed employee expenses as miscellaneous itemized deductions
unless you are an Armed Forces reservist, a qualified performing artist, a fee-basis state or local government official, or an employee with impairment-related work expenses. Due to the suspension of miscellaneous itemized deductions subject to the 2% floor under section 67(a), employees who do not fit into one of the listed categories cannot deduct employee business expenses. See the categories listed under Other Employee Business Expenses in Publication 516, U.S. Government Civilian Employees Stationed Abroad.
2. U.S. Territories/Possessions
This page does not cover the rules that apply if you are stationed in American Samoa, Guam, the Commonwealth of the Northern Mariana Islands, the U.S. Virgin Islands, or Puerto Rico. That information may be found in Individuals Living in U.S. Possessions.
3. Foreign Income
If you are a US citizen or resident alien with income from sources outside the United States, you must report all that income on your U.S. tax return unless it is exempt by US law. This applies to earned income (such as wages) as well as unearned income (such as interest, dividends, and capital gains).
4. Other Employment
If you are a US citizen or resident employed abroad by the US Government and you also receive income from a private employer or self-employment, you may qualify to claim the exclusions or the deduction applicable to this other income. To qualify, you must meet either the bona fide residence test or the physical presence test. Your spouse who is a US citizen or resident alien may also qualify if he or she earns income in a foreign country that is paid by a private employer or is from self-employment. If you are not a U.S. government employee, amounts paid by the United States or its agencies to you may also qualify for the exclusions or the deduction. Refer to Foreign Earned Income Exclusion.