The United States is one of the few countries that taxes based on citizenship, not residency.
While American citizens are still on the hook to pay taxes to the U.S. while living overseas, there are ways to reduce that bill, according to David McKeegan, co-founder of Greenback Expat Tax Services.
That includes the foreign earned income exclusion, which may allow you to exclude a certain amount of earnings while living in another country from your U.S. federal return. In 2018, the limit for that exclusion is $104,100.
The IRS has definite rules for what qualifies as foreign earned income.
In order to be eligible, you must also must pass one of two tests. The first is the physical presence test, which means you have been in a foreign country for 330 days of the year.
The second is the bona fide residence test. This status is for individuals who are living overseas and do not plan to return to the U.S., according to McKeegan. In order to pass, you must be a resident of a foreign country for a continuous period of time including one tax year.
You may also be able to claim a foreign housing exclusion or deduction. In order to qualify, your tax home must be in a foreign country and you must be eligible for either the physical presence or bona fide residence tests.
In the United Kingdom, the limit for this exclusion is around $68,700 for expenses such as rent and utilities, according to McKeegan. It does not cover extravagant housing costs. Markle, who lives with Prince Harry on the grounds of Kensington Palace, probably won’t qualify, McKeegan said.
You may also be able to take advantage of the foreign tax credit, which may be applied if you were taxed on the same income by the U.S. and another country.
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