No Taxes for Americans Earning Up to $126,500 Abroad in 2024, but Conditions Apply

The IRS has clarified that U.S. citizens who spend more than 330 days outside the United States in a year will not be required to pay federal taxes on income earned up to $126,500 in 2024. This tax exemption applies specifically to income earned in foreign countries and is governed by the Foreign Earned Income Exclusion (FEIE) provision. The exemption is intended to ease the tax burden on Americans living and working abroad, provided they meet specific criteria.

“A common misconception about the Foreign Earned Income Exclusion is that the excluded income does not need to be reported on a U.S. tax return. In fact, the exclusion applies only if you are a qualifying individual with foreign earned income, meet all of the requirements to claim the exclusion, and file a tax return reporting the income,” the IRS clarified.

To qualify, individuals must spend at least 330 days outside the United States within any 12-month period. The 12 months do not necessarily need to align with the calendar year. For instance, someone who stays abroad for 330 days from June 2023 to June 2024 can claim the exclusion for both the 2023 and 2024 tax years. However, staying in the U.S. for more than 34 days during this period disqualifies them from the exemption.

The maximum exclusion for 2023, which was $120,000 per qualifying individual, has increased to $126,500 for 2024. Married couples where both spouses work abroad and meet the bona fide residence test or the physical presence test can each claim the exclusion, allowing them to exclude up to $253,000 combined for 2024.

“If the period for which you qualify for the Foreign Earned Income Exclusion includes only part of the year, you must adjust the maximum limit based on the number of qualifying days in the year,” the IRS noted.

In addition to the income exclusion, individuals can claim a foreign housing exclusion or deduction for qualified housing expenses. For 2023, the housing amount limitation was $36,000, which has increased to $37,950 for 2024.

“However, the limit will vary depending on the location of your foreign tax home and the number of qualifying days in the tax year. If you are claiming a foreign housing exclusion, you must calculate that amount first because the Foreign Earned Income Exclusion is limited to your foreign earned income minus any foreign housing exclusion you claim,” the IRS clarified.

Income is generally considered earned in the year the work was performed, even if payment is received in a different year. For example, if you earned $100,000 in 2022 but received $20,000 of that amount in 2023, you must apply the exclusion limit for 2022 to determine how much of the $20,000 can be excluded in 2023. Income received after the year following the year it was earned cannot be excluded.

Exceptions apply for year-end payroll periods. For instance, salary for work performed at the end of December but paid in early January may be considered earned in the year it was received if it falls within a standard payroll cycle.

Under the physical presence test, a 12-month qualifying period must include at least 330 full days of presence in a foreign country. This period can span any 12 consecutive months, making it essential to carefully choose the timeframe for maximum exclusion.

Self-employed individuals must calculate their exclusion by determining the proportion of their foreign gross receipts allocated to excluded income, accounting for business expenses and self-employment tax deductions. For example, if $120,000 of $150,000 in gross receipts is excluded, the proportional share of expenses is applied to the excluded amount, reducing the overall exclusion.

While the Foreign Earned Income Exclusion provides significant financial relief, individuals must adhere to all IRS requirements, including reporting their income and using Form 2555 to calculate the exclusion. Failure to comply could result in penalties or the loss of the exclusion.