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Tax on Foreign Income of US Citizens or Residents

Tax on Foreign Income of US Citizens or Residents

Foreign Earned Income Exclusion
Individual US citizens and residents are taxed on their worldwide income. However, IRC Sec. 911 provides that qualified taxpayer can elect to exclude foreign earned income up to $87,600 from taxable income. (Read IRS Pub 54 for more details.) The qualifications are:

  • A citizen or resident of the US who has been a bona fide resident of a foreign country for an entire taxable year; or
  • A citizen or resident of US who is present in a foreign country during at least 330 full days during any period of 12 consecutive months.

Additionally, the excludable income must be “earned income”, meaning compensation for personal services actually performed in the foreign country when the taxpayer qualifies for bona fid resident or physical presence test.

Qualified taxpayers can elect to take the foreign earned income election by filing Form 2555 with their tax return. However, foreign tax paid will be allocated on total foreign source income, any foreign tax allocated to the excluded foreign earned income cannot qualify a tax credit again. Therefore, taxpayers should consider taking full foreign tax credit rather than the exclusion if the foreign effective tax rate is higher than US.

Note: Dates spent in or income from Cuba, Iraq and Libya do not qualify. (Form 2555 instruction)

Foreign Tax Credit
Generally, taxes paid to foreign governments are deductible in the same manner a US state and local taxes on Schedule A. Alternatively, taxpayers can elect to claim foreign income tax as a credit by filling Form 1116 annually. In most instances, foreign tax credit saves more income tax than a deduction, and also avoids triggering AMT. One caution is that any foreign tax allocated to excluded earned income is not eligible as either deduction or credit.

We hope you found this article about “Tax on Foreign Income of US Citizens or Residents” helpful.  If you have questions or need expert tax or family office advice that’s refreshingly objective (we never sell investments), please contact us or visit our Family office page  or our website at www.GROCO.com.  Unfortunately, we no longer give advice to other tax professionals gratis.

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Alan Olsen, CPA

Alan Olsen, is the Host of the American Dreams Show and the Managing Partner of GROCO.com.  GROCO is a premier family office and tax advisory firm located in the San Francisco Bay area serving clients all over the world.


Alan L. Olsen, CPA, Wikipedia Bio


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GROCO.com is a proud sponsor of The American Dreams Show.



The American Dreams show was the brainchild of Alan Olsen, CPA, MBA. It was originally created to fill a specific need; often inexperienced entrepreneurs lacked basic information about raising capital and how to successfully start a business. Alan sincerely wanted to respond to the many requests from aspiring entrepreneurs asking for the information and introductions they needed. But he had to find a way to help in which his venture capital clients and friends would not mind.

The American Dreams show became the solution, first as a radio show and now with YouTube videos as well. Always respectful of interview guest’s time, he’s able to give access to individuals information and inspiration previously inaccessible to the first-time entrepreneurs who need it most. They can listen to venture capitalists and successful business people explain first-hand, how they got to where they are, how to start a company, how to overcome challenges, how they see the future evolving, opportunities, work-life balance and so much more..

American Dreams discusses many topics from some of the world’s most successful individuals about their secrets to life’s success. Topics from guest have included:

Creating purpose in life / Building a foundation for their life / Solving problems / Finding fulfillment through philanthropy and service / Becoming self-reliant / Enhancing effective leadership / Balancing family and work…

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MyPaths.com (Also sponsored by GROCO) provides free access to content and world-class entrepreneurs, influencers and thought leaders’ personal success stories. To help you find your path in life to true, sustainable success & happiness.  It’s mission statement:

In an increasingly complex and difficult world, we hope to help you find your personal path in life and build a strong foundation by learning how others found success and happiness. True and sustainable success and happiness are different for each one of us but possible, often despite significant challenges. Our mission at MyPaths.com is to provide resources and firsthand accounts of how others found their paths in life, so you can do the same.

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