Exclusion amount. The maximum foreign earned income exclusion is now adjusted annually for inflation. For 2006, the maximum exclusion has increased
to $82,400. See
Limit on Excludable Amount under Foreign Earned Income Exclusion in chapter 4.
Figuring tax on income not excluded. If you claim the foreign earned income exclusion, the housing exclusion, or both, you must figure the tax on your nonexcluded
income using the tax
rates that would have applied had you not claimed the exclusions. See the instructions for Form 1040 and complete the Foreign Earned Income Tax
Worksheet to figure the amount of tax to enter on Form 1040, line 44. If you must attach Form 6251 to your return, use the Foreign Earned
Income Tax Worksheet provided in the instructions for Form 6251.
Housing expenses—base amount. The computation of the base housing amount (line 32 of Form 2555) has changed and is now tied to the maximum foreign earned
income exclusion. The
amount is 16 percent of the exclusion amount (computed on a daily basis), multiplied by the number of days in your qualifying
period that fall within
your 2006 tax year. For 2006, this amount is $36.12 per day ($13,184 per year). See Housing Amount under Foreign Housing Exclusion and
Deduction in Chapter 4.
Housing expenses—maximum amount. The amount of qualified housing expenses eligible for the housing exclusion and housing deduction is now limited. See Limit on housing
expenses under Foreign Housing Exclusion and Deduction in chapter 4.
Exemption amount. The amount you can deduct for each exemption has increased to $3,300 in 2006.
Exemption phaseout. You lose part of the benefit of your exemptions if your adjusted gross income is above a certain amount. The amount at which
the phaseout begins
depends on your filing status. For 2006, the phaseout begins at:
-
$112,875 for married persons filing separately,
-
$150,500 for single individuals,
-
$188,150 for heads of household, and
-
$225,750 for married persons filing jointly or qualifying widow(er)s.
However, beginning in 2006, you can lose no more than ⅔ of the amount of your exemptions. In other words, each exemption
cannot
be reduced to less than $1,100.
Standard deduction. The standard deduction for people who do not itemize deductions on Schedule A (Form 1040) is, in most cases, higher for 2006.
The amount depends on
your filing status, whether you are 65 or older or blind, and whether an exemption can be claimed for you by another person.
The amounts for the
standard deduction for 2006 are shown in the instructions for your tax return.
Itemized deductions. If your adjusted gross income is above a certain amount, you may lose part of your itemized deductions. In 2006, this amount
has increased to
$150,500 ($75,250 if married filing separately). However, beginning in 2006, the amount by which these deductions are reduced
is only 2/3 of the
amount of the reduction that otherwise would have applied.
Filing requirements. Generally, the amount of income you can receive before you must file an income tax return has increased. These amounts are
shown in chapter 1 under
Filing Requirements.
Maximum self-employment tax. For 2006, the maximum amount of net earnings from self-employment that is subject to the social security part of the self-employment
tax has
increased to $94,200. All net earnings are subject to the Medicare part of the tax. For more information, see chapter 3.
Maximum contribution to individual retirement arrangements (IRAs) for those age 50 or older. . The maximum amount you can contribute to your traditional IRA for 2006 has increased to $5,000 if you are age 50 or older.
IRAs are discussed in
detail in Publication 590, Individual Retirement Arrangements (IRAs).
This publication discusses special tax rules for U.S. citizens and resident aliens who work abroad or who have income earned
in foreign countries.
As a U.S. citizen or resident alien, your worldwide income generally is subject to U.S. income tax, regardless of where you
are living. Also, you are
subject to the same income tax filing requirements that apply to U.S. citizens or resident aliens living in the United States.
Resident alien.
A resident alien is an individual who is not a citizen or national of the United States and who meets either the green
card test or the substantial
presence test for the calendar year.
-
Green card test.
You are a U.S. resident if you were a lawful permanent resident of the United States at any time during
the calendar year. This is known as the green card test because resident aliens hold immigrant visas (also known as green
cards).
-
Substantial presence test.
You are considered a U.S. resident if you meet the substantial presence test for the calendar
year. Under this test, you must be physically present in the United States on at least:
-
31 days during the current calendar year, and
-
183 days during the current year and the 2 preceding years, counting all the days of physical presence in the current year,
but only ⅙ the number of days of presence in the first preceding year, and only ⅙ the number of days in the second preceding
year.
For more information on resident and nonresident status, the tests for residence, and the exceptions to them, see
Publication 519.
Filing information.
Chapter 1 contains general filing information, such as:
-
Whether you must file a U.S. tax return,
-
When and where to file your return,
-
How to report your income if it is paid in foreign currency,
-
How to determine your filing status if your spouse is a nonresident alien, and
-
Whether you must pay estimated tax.
Withholding tax.
Chapter 2 discusses the withholding of income, social security, and Medicare taxes from the pay of U.S. citizens and
resident aliens. It will help
you determine if the correct amounts of taxes are being withheld and how to adjust your withholding if too much or too little
is being withheld.
Self-employment tax.
Chapter 3 discusses who must pay self-employment tax.
Foreign earned income exclusion and housing exclusion and deduction.
Chapter 4 discusses income tax benefits that apply if you meet certain requirements while living abroad. You may qualify
to treat up to $82,400 of
your income as not taxable by the United States. You may also be able to either deduct part of your housing expenses from
your income or treat a
limited amount of income used for housing expenses as not taxable by the United States. These benefits are called the foreign
earned income exclusion
and the foreign housing deduction and exclusion.
To qualify for either of the exclusions or the deduction, you must have a tax home in a foreign country and earn income
from personal services
performed in a foreign country. These rules are explained in chapter 4.
If you are going to exclude or deduct your income as discussed above, you must file Form 2555 or Form 2555-EZ. You
will find an example with
filled-in Forms 2555 and 2555-EZ in chapter 4.
Exemptions, deductions, and credits.
Chapter 5 discusses exemptions, deductions, and credits you may be able to claim on your return. These are generally
the same as if you were living
in the United States. However, if you choose to exclude foreign earned income or housing amounts, you cannot deduct or exclude
any item or take a
credit for any item that is related to the amounts you exclude. Among the topics discussed in chapter 5 are:
-
Exemptions you can claim,
-
Contributions you can deduct,
-
Moving expenses you can deduct, and
-
Foreign taxes you can either deduct or take a credit for.
Tax treaty benefits.
Chapter 6 discusses some benefits that are common to most tax treaties and explains how to get help if you think you
are not receiving a treaty
benefit to which you are entitled. It also explains how to get copies of tax treaties.
How to get tax help.
Chapter 7 is an explanation of how to get information and assistance from the IRS.
Questions and answers.
Frequently asked questions and answers to those questions are presented in the back of the publication.
Comments and suggestions.
We welcome your comments about this publication and your suggestions for future editions.
You can write to us at the following address:
Internal Revenue Service
Individual Forms and Publications Branch
SE:W:CAR:MP:T:I
1111 Constitution Ave. NW, IR-6406
Washington, DC 20224
We respond to many letters by telephone. Therefore, it would be helpful if you would include your daytime phone number,
including the area code, in
your correspondence.
You can email us at
*taxforms@irs.gov. (The asterisk must be included in the
address.) Please put “
Publications Comment” on the subject line. Although we cannot respond individually to each email, we do appreciate your
feedback and will consider your comments as we revise our tax products.
Ordering forms and publications.
Visit
www.irs.gov/formspubs to download forms and publications, call 1-800-829-3676, or write to the address shown below and receive a response
within 10 business days after your request is received.
National Distribution Center
P.O. Box 8903
Bloomington, IL 61702-8903
Tax questions.
If you have a tax question, visit
www.irs.gov or call 1-800-829-1040. We cannot answer tax questions sent to
either of the addresses above.
