The U.S. Internal Revenue Service (IRS) announced the foreign earned income exclusion amount will be $120,000 for 2023 [Rev. Proc. 2022-38, 18 October 2022]. The foreign earned income exclusion is $112,000 in 2022.
Internal Revenue Code (IRC) §911 allows U.S. citizens and resident alien employees working outside the U.S. (i.e., expatriates) who qualify for the foreign earned income exclusion to exclude the first $120,000 of foreign earned income in 2023 from their gross income. Employees who qualify may also exclude certain housing cost amounts from their gross income.
To qualify for the foreign earned income or housing cost exclusion, an employee must have foreign earned income and a "tax home" in a foreign country. The employee must also meet either a bona fide residence or physical presence test that proves the employee is not living in the U.S. during the year in question.
An employer need not withhold federal income tax from any wages paid to a qualifying employee it reasonably believes will be excluded from income under the IRC §911 exclusions.
Foreign Housing Cost Exclusion
In addition to the foreign earned income exclusion, employees who have a foreign tax home and qualify under the bona fide residence or physical presence test can take an exclusion for a limited amount of reasonable foreign housing expenses exceeding a base housing amount.
The base housing amount is 16% of the maximum foreign earned income exclusion, figured on a daily basis, multiplied by the number of days during the year the employee met the bona fide residence or physical presence test.
The maximum amount of the foreign housing cost exclusion will be $16,800 in 2023 ($15,680 in 2022).
Rayna Alexander, Esq., is Editor, Payroll Information Resources, for the American Payroll Association