An expatriate is an employee working in a country other than their country of origin. An expatriate may also be referred to as a PCN or parent-country national. Long periods of assignment (perhaps 4 –5 years or more) may run the risk of “de facto” employee status in the host country, so that labor laws of the host country apply.
A U.S. expatriate residing abroad, still owes U.S. taxes each year on his or her worldwide income. The US has income tax treaties with over 35 other countries. The IRS and the foreign taxing authorities can exchange information on their citizens living in the other country. Qualifying U.S. citizens and residents working outside the United States are permitted to elect to exclude a portion of their foreign earned income under the Internal Revenue Code (IRC). This section provides a general exclusion limited to a specified amount, another exclusion measured by foreign housing costs, and, for self-employed persons, a foreign housing cost deduction.
To qualify for the foreign earned income and housing cost exclusions, the individual must have foreign earned income, his or her tax home must be in a foreign country, and he or she must meet either of two tests:
- The bona fide residence test, which requires the taxpayer to be a bona fide resident of a foreign country or countries for an uninterrupted period that includes a full tax year, or
- The physical presence test, which requires the individual to be present in a foreign country or countries at least 330 full days during a period of 12 consecutive months.
A U.S. citizen may qualify under either the bona fide residence or physical presence test. A U.S. resident alien working abroad can qualify under the physical presence test, and in certain limited cases, tax treaty nondiscrimination rules may permit qualification under the bona fide residence rule.