Revenue Ruling 82-11: Foreign Income and U.S. Tax
For U.S. citizens employed by foreign governments abroad, understand how U.S. tax law applies and what relief provisions may be available for your income.
The United States taxes its citizens on their worldwide income, regardless of where they live. This global approach to taxation can create intricate tax situations for Americans working in foreign countries. The Internal Revenue Service (IRS) issues guidance to clarify how the tax code applies to particular circumstances involving U.S. and international tax laws. Understanding these official interpretations helps taxpayers determine which earnings are subject to U.S. tax and what relief provisions might be available, which is a necessary step for proper tax compliance.
U.S. Citizenship and the Foreign Government Income Exemption
Internal Revenue Code Section 893 provides a tax exemption for the official wages paid by a foreign government to its employees for services performed within the United States. This exemption is rooted in international comity and applies to employees of foreign governments and international organizations, but it does not extend to U.S. citizens. The IRS reasoning is that this provision was intended to benefit foreign nationals performing official duties in the U.S., not to provide a tax benefit to U.S. citizens.
This distinction is important for U.S. citizens working overseas. Their U.S. citizenship makes their worldwide income subject to U.S. taxation, which overrides any potential exemption from a foreign government employer. Therefore, the income earned by a U.S. citizen from a foreign government is fully includible in their gross income for U.S. tax purposes.
Determining Applicability to Your Situation
To understand if these rules affect your tax situation, you must assess three elements of your employment arrangement. The first is your citizenship status, as this guidance is directed at U.S. citizens. The second element is the nature of your employer. These rules apply to individuals who receive compensation from a foreign government or a designated international organization.
An entity is considered a foreign government if it is an integral part or a controlled entity of a foreign sovereign. This includes a foreign state, one of its political subdivisions, or a public international organization as defined under U.S. law. The final criterion is the location where you perform your services.
Tax Reporting and Potential Relief
Income not exempt under these rules must be reported on your U.S. tax return. Two provisions can help reduce or eliminate the U.S. tax on this foreign-source income: the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC). These mechanisms are designed to prevent double taxation, which can occur when both the U.S. and a foreign country tax the same income.
The Foreign Earned Income Exclusion allows qualifying individuals to exclude a certain amount of their foreign earnings from U.S. taxable income. For the 2025 tax year, this exclusion is capped at $130,000. To qualify, you must have a tax home in a foreign country and meet either the bona fide residence test or the physical presence test. The bona fide residence test requires you to be a resident of a foreign country for an entire tax year, while the physical presence test requires you to be physically present in a foreign country for at least 330 full days during any 12-month period. This exclusion is claimed by filing Form 2555, Foreign Earned Income.
Alternatively, the Foreign Tax Credit offers a dollar-for-dollar reduction of your U.S. income tax liability for income taxes you have already paid to a foreign country. You can claim the credit for foreign income taxes, war profits taxes, and excess profits taxes. The credit is calculated on Form 1116, Foreign Tax Credit. If your foreign tax liability on the income is higher than your U.S. tax liability, the credit can eliminate your U.S. tax on that income entirely.