The IRS released updated 2022 figures that affect U.S. citizens living abroad, gifting to foreign spouses, and those considering renouncing citizenship. Below are the key thresholds and how they may influence tax planning.
Foreign Earned Income Exclusion (FEIE)
- 2022 limit: $112,000 of foreign‑earned earned income can be excluded from U.S. taxable income.
- This is an increase from the 2021 limit of $108,700, reflecting inflation adjustments.
- The exclusion applies only to earned income (wages, salaries, or self‑employment earnings). It does not cover passive income such as dividends, interest, or capital gains.
- Even when the FEIE is claimed, self‑employment income may still be subject to Social Security and Medicare taxes.
Gift‑Tax Limits Involving Foreign Persons
| Item | 2022 Amount | Change |
|---|---|---|
| Gift to a non‑citizen spouse | $164,000 | Up from $159,000 |
| Notice of large gifts received from foreign persons (Form 3520) | $17,339 | Up from $16,815 |
| Annual gift‑tax exclusion (general) | $16,000 | Up from $15,000 |
These thresholds affect how much can be transferred without filing additional forms or incurring gift‑tax liability.
Exit Tax (Renouncing U.S. Citizenship)
Two tests determine whether an expatriate is “covered” and subject to the exit tax:
- Net‑worth test – If worldwide net assets are $2 million or more at the time of expatriation, the individual is a covered expatriate.
- Income‑tax test – If the average federal income tax paid over the preceding five years exceeds $178,000 (up from $172,000 in 2021), the individual is also covered.
Exit‑tax calculation:
- The first $767,000 of mark‑to‑market gain on worldwide assets is excluded from taxation (increase from $744,000 in 2021).
- Gains above that amount are taxed at the applicable capital‑gain rates.
- If total gains are $767,000 or less, a covered expatriate may owe no exit‑tax liability despite meeting the net‑worth or income‑tax tests.
Practical Implications for Expats
- Location choice: Countries with little or no income tax (e.g., United Arab Emirates, Cayman Islands) can simplify the interaction between foreign earned income and U.S. tax obligations.
- Business structure: Operating a foreign corporation may help keep earnings within the FEIE limit, but self‑employment taxes still apply on salary paid to the U.S. citizen.
- Gift planning: The higher limits for gifts to foreign spouses and the increased annual exclusion reduce the need for additional reporting, but gifts above these amounts still require filing Form 3520.
- Renunciation timing: Individuals near the $2 million net‑worth threshold or the $178,000 five‑year tax average should assess the potential exit‑tax bill before renouncing. Reducing assets or accelerating tax payments can lower exposure.
Decision Checklist
- Do you have foreign earned income? Verify that it qualifies as earned (not passive) and that the $112,000 exclusion covers the bulk of your salary.
- Are you gifting to a foreign spouse or other foreign persons? Compare the amount to the 2022 limits to determine filing requirements.
- Are you considering expatriation?
- Calculate current net worth and five‑year average federal tax liability.
- Estimate potential mark‑to‑market gains to see if they exceed the $767,000 exemption.
- Consult a tax professional to model the exit‑tax impact.
These 2022 updates reflect inflation adjustments and modest expansions of thresholds, but the fundamental U.S. policy of taxing citizens worldwide remains unchanged. Careful planning around the FEIE, gift‑tax rules, and exit‑tax tests can significantly affect the overall tax burden for Americans living abroad.
