Can U.S. Embassy Employees Claim the Foreign Tax Credit?
- Nov 27, 2023
To answer the title question: Yes! Income earned while working abroad for the U.S. government, even on property owned by the U.S. government, such as a U.S. embassy, is considered foreign-source income for purposes of the foreign tax credit. U.S. government employees, however, are not eligible to claim the foreign earned income exclusion or the foreign housing exclusion/deduction.
Generally, U.S. government employees working abroad are not required to pay foreign income taxes. However, in those situations where they do have a foreign income tax liability, claiming the foreign tax credit can result in significant U.S. tax savings. The following examples illustrate the impact of claiming the foreign tax credit on a U.S. embassy employee’s U.S. tax liability:
- Mark and his wife, Carin, are U.S. citizens. Mark works at the U.S. embassy in Israel and Carin works at an Israeli startup in Tel Aviv. Israel has a higher individual income tax rate than the U.S. and Carin pays a significant amount of Israeli income taxes that exceed the U.S. taxes owed on her income. If Mark and Carin file a joint U.S. tax return, the Israeli income taxes can be used to fully offset the U.S. taxes owed on Carin’s income and the excess Israeli income taxes can be used to reduce the U.S. tax liability on Mark’s income. Therefore, because Mark’s income as a U.S. embassy employee is treated as foreign-source income, the excess foreign taxes paid on Carin’s income can be used as a foreign tax credit against Mark’s income, resulting in significant U.S. tax savings.
- Susan is a U.S. citizen. Susan is currently working at the U.S. embassy in France. Prior to moving to France as a U.S. embassy employee, Susan lived in England working for a local company. England has a higher individual income tax rate than the U.S. and Susan had accumulated significant foreign tax credit carryovers. Because Susan’s income as a U.S. embassy employee is treated as foreign-source income, she can now apply the prior-year foreign tax credits against her current U.S. tax liability.
If you or someone you know is currently working abroad as a U.S. government employee, consult with a tax professional who can determine foreign tax credit eligibility for past and future tax years.
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Josh Pittleman is a Tax Senior in the firm's financial services group and has 5 years of experience.
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