What deductions and/or credits am I allowed on my U.S. income tax return as a U.S. citizen living and working in a foreign country

As a U.S. citizen living and working in a foreign country, you are generally allowed the same deductions and credits as citizens and residents living in the United States. However, there are specific provisions and benefits available to you due to your foreign residency. Here are the key deductions and credits you may be eligible for:

1. Foreign Earned Income Exclusion:
   • You may exclude up to $120,000 of your foreign earned income from your gross income if you meet the requirements of either the bona fide residence test or the physical presence test.
   • To qualify, your tax home must be in a foreign country, and you must be either a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year or be physically present in a foreign country for at least 330 full days during any period of 12 consecutive months.
   • This exclusion is claimed by filing Form 2555 with your U.S. income tax return.
2. Foreign Housing Exclusion or Deduction:
   • You may also exclude or deduct certain housing costs if your housing expenses exceed a base amount. The housing exclusion applies if your housing expenses are paid for with employer-provided amounts, while the housing deduction applies if you are self-employed.
   • The housing exclusion or deduction is also claimed on Form 2555.
3. Foreign Tax Credit:
   • If you paid or accrued foreign taxes to a foreign country on foreign source income and are subject to U.S. tax on the same income, you may be able to take a foreign tax credit. This credit reduces your U.S. tax liability dollar-for-dollar by the amount of foreign taxes paid.
   • The foreign tax credit is claimed by filing Form 1116 with your U.S. income tax return.
   • Note that if you claim the foreign earned income exclusion, your foreign tax credit or deduction will be reduced.
4. Itemized Deductions:
   • You can claim itemized deductions for eligible expenses such as mortgage interest, charitable contributions, and medical expenses, similar to taxpayers living in the United States.
   • Foreign income taxes paid can also be deducted as an itemized deduction on Schedule A if you do not claim them as a credit on Form 1116.
5. Other Deductions and Credits:
   • You may also qualify for other deductions and credits available to U.S. taxpayers, such as the child tax credit, education credits, and retirement savings contributions credit, provided you meet the specific requirements for each.
6. Exclusion of Employer-Provided Meals and Lodging:
   • If you are required to live in a camp provided by your employer in a remote area, you can exclude the value of meals and lodging provided to you, your spouse, and your dependents.

It is important to note that income earned as an employee of the U.S. Government or its agencies does not qualify for the foreign earned income exclusion or the foreign housing exclusion/deduction. Additionally, you must file a U.S. income tax return to claim these benefits, and you may need to attach the relevant forms (Form 2555, Form 1116, etc.) to your return.

For more detailed information and specific examples, refer to IRS Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad, and IRS Publication 514, Foreign Tax Credit for Individuals.

Sources:
§ 911. Citizens or residents of the United States living abroad
Instructions for Form 2555 (2023)
Instructions for Form 1116 (2023)
IRM Part 3. Submission Processing. Chapter 38. International Tax Returns and Documents. Section 147. International Notices
Publication 593