How to Be Exempt From Federal Taxes When Working Out of the Country

Living and working abroad can put you in a taxing situation
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Dealing with U.S. taxes can put a damper on the adventure of foreign travel and work. Unfortunately, the IRS -- unique among the world's taxing agencies -- demands that you account for your income no matter where you are and pay taxes on it. There are rules that lessen the burden if you pay foreign income and social security taxes, or if you stay abroad for all but 35 days out of the year.

Step 1

Claim the foreign tax credit. If you have worked in and paid taxes to a foreign country, the IRS allows you to subtract these payments from your U.S. tax obligation. You must file a return with the IRS to claim the credit. You may not apply the tax credit to any foreign taxes paid on money that the IRS excludes from taxable income.

Step 2

Stay put in your foreign country of choice and don't return to the United States for more than 35 days out of the year. You'll pass the bona fide foreign residence test and the IRS will exclude up to $95,100 of your income from taxes (as of tax year 2012). You can exempt up to that amount of your spouse's income as well. This exemption applies only to earned income -- not to investment income, capital gains, rents and the like.

Step 3

Work for a foreign employer and pay foreign social security and other payroll taxes according to local law. You will be exempt from U.S. Social Security and Medicare taxes. If you are self-employed, however, you must file Schedule C and Schedule SE to pay the U.S. self-employment tax, unless the foreign country has a social security agreement with the United States and you elect to pay the foreign taxes.

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