Firstly, it is important to note that if your tax situation is particularly complex, it is always a good idea to speak with a certified public accountant, to make sure that you are taking full advantages of the tax law. Earning foreign income as a United States citizen is a somewhat complicated procedure, and claiming the exemption can be a bit complicated. However, in some situations it may be straight forward, and you may be able to calculate your exemption easily on your own.
All United States citizens are required to pay income taxes on their income, no matter where in the world they are residing or working. However, in order to accommodate citizens who may be paying taxes abroad, the United States has set up a very helpful procedure to help from paying too many taxes: the foreign income exclusion.
The foreign earned income exclusion may be up to $80,000 US Dollars (USD), which a United States citizen can exclude each year from their federal income taxes. In order to be eligible for this exclusion, the citizen must be able to prove that they are either a bona fide resident of a foreign country, or that they were physically present there. They must, of course, also be working in the foreign country. The exclusion can be claimed using the Form 2555, or in some cases the shorter Form 2555-EZ.
In order to be able to claim a foreign income exemption, you need only be working in a foreign country. Where you are paid, and where you are paid from does not play into whether or not you have foreign income. If you are residing in the United States, but are paid by a German company into a German bank account, it is still considered national income and is taxed normally. Conversely, if you are working in the United States, but the employer you’re working for is an American company, and your income is wired into your American bank account, you are still eligible for a foreign income exemption.
The calculation that shows your total tax burden is best demonstrated by an example: Let’s assume you’re working for a large international company as a hotel consultant. You work five days a week, with vacation time and sick leave, giving you 220 total days of work each year. You are salaried at $55,000 USD each year, and in addition to that received a small living stipend of $10,000 USD to cover your rent. Although the majority of the time you work was spent abroad, you returned to the United States occasionally to work in the home office, for a total of 18 days. So to calculate your tax burden in the United States you would take the number of days worked there (18), and divide it by the total number of days worked (220), and multiply that by your total income plus stipends ($65,000 USD), resulting in a tax burden of $5,400 USD that you’ll need to pay taxes on.