Guide to Global Payroll Management Wages excluded under foreign earned income or housing cost exclusion2 Federal income tax is not required to be withheld from an employee's wages to the extent that the employer reasonably believes that the wages will be excluded from the employee's income under the foreign earned income exclusion or the foreign housing cost exclusion. These exclusions provide relief from double taxation of expatriates by allowing them to exclude the first $107,600 of their foreign earned income in 2020 plus certain foreign housing cost amounts from their gross income for U.S. tax purposes.3 The maximum exclusion amount is adjusted for inflation to the next lowest multiple of $100. See Chapter 6 for detailed explanations of the exclusions. Claiming the exclusions. Employees who believe they will qualify for either exclusion must give their employer a signed statement to that effect. They can prepare their own statement or use Form 673, Statement for Claiming Exemption From Withholding on Foreign Earned Income Eligible for the Exclusion(s) Provided by Section 911 (see Appendix D, page D-56). The completed form tells the employer whether the employee qualifies for the exclusions under the bona fide residence or physical presence test, how long the employee intends to remain in the foreign country during the year, and what the employee's estimated housing expenses for the year will be. This information helps the employer calculate how much of the employee's wages will be exempt from federal income tax withholding. Generally, the employee's filing of Form 673 provides authorization for the employer to reduce or discontinue withholding. However, if the employer has reason to believe the employee will not qualify for the exclusions, it must disregard the statement and withhold the tax. Wages subject to foreign income tax withholding4 The employer is not required to withhold federal income tax from an expatriate's wages if the employer is required by the law of a foreign country (including a U.S. possession) to withhold foreign income tax from those wages. A mere agreement to withhold between the employer and the employee is not enough to support the exemption; the withholding must be required by foreign law. A signed statement from the employee attesting to the foreign withholding requirement should be kept on file by the employer. This exemption does not apply to federal government employees. 2. 3. 4. 5-2 IRC §3401(a)(8)(A)(i); IRS Reg. §31.3401(a)(8)(A)-1(a); IRC §911. IRC §911(a), (b). IRC §3401(a)(8)(A)(ii); IRS Reg. §31.3401(a)(8)(A)-1(b).