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one of the biggest benefits of international work is no u.s. taxes, or at least no taxes on the first $80,000 of income. it took me a while to figure it all out, but i think i’ve got it straight now. if you’re interested in the nuts & bolts, read on.**

the best reference is “tax guide for u.s. citizens & resident aliens living abroad.” it’s long and written in legalese, but it’s got all the fine print you’ll need to make sure that you don’t owe thousands of dollars in back-taxes when you return to the states.

to qualify for exclusions on your foreign-earned income, your tax home must be in a foreign country. according to the IRS, “your tax home is the general area of your main place of business, employment, or post of duty, regardless of where you maintain your family home.” if you work abroad, your tax home is whatever country you live in, so your tax home is in a foreign country, and you qualify. but, wait. it’s not that simple.

to exclude your foreign-earned income, you either have to satisfy the bona fide residence test or the physical presence test.

(1) bona fide residence test: you meet the bona fide residence test if you are a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. this doesn’t mean you just live in a country for a year’s time. rather, you have to establish residence. i.e. you have a residence visa. this isn’t me, and i imagine it’s not most people working in international aid. so, on to test #2.

(2) physical presence test: you meet the physical presence test if you are physically present in a foreign country or countries 330 full days during a period of 12 consecutive months. the days do not have to be consecutive, nor do the 12 months have to start/end in january. the rules regulating how you count the 330 days, how you can overlap the 12 month intervals, etc are complicated, so definitely consult someone more qualified than me to make sure you don’t get screwed.

i don’t satisfy either test, yet, but i will eventually satisfy the physical presence test. staying out of the u.s. 330 days a year means that i will save thousands of dollars in taxes. yowza.

now that i know i can exclude my income, does that mean i keep paying taxes, then recover them when i file in april? no. if you can reasonably be expected to exclude wages earned abroad under either the foreign-earned income exclusion or the foreign housing exclusion (doesn’t pertain to me, so i don’t know anything about this exclusion), then your employer does not need to withhould u.s. income tax from those wages. beware, though, your employer can’t simply stop withholding taxes. to legally withhold taxes, you need to complete a form 673. don’t give your completed form 673 to the IRS, give it directly to your employer. once your employer receives the form 673, they can stop withholding your federal taxes.

finally, even though you’ve qualified to exclude your foreign-earned income, you still have to file a tax return. just accompany your 1040 or 1040EZ with form 2555 or form 2555EZ, respectively.

re: state taxes. if you don’t live in any state, you are not a resident of any state, so you don’t owe state taxes to anyone. 101paige 101ht 101iph

**disclaimer: this is not legal advice. this is what i’ve learned first-hand, and by no means am i a tax attorney. if you use this information without doing your own research, you do so at your own risk.