Exclusion tax

What is an exclusion tax?

Exclusion tax represents income that taxpayers do not have to include in their gross income when calculating income for tax purposes. For the purposes of this definition, income includes pay as well as income received as a benefit, gift or inheritance. The amount of income excluded is subject to federal and state tax law.

Deeper definition

Exclusion tax refers to income that doesn’t have to be included in your gross income as determined by tax laws. In this sense, it differs from tax deductions, which are amounts you can deduct from your income, such as expenses incurred, while earning income.

U.S. citizens and resident aliens who are living abroad are taxed in the U.S. on income earned abroad. However, if the U.S. citizen lives abroad for a full tax year or is away from the U.S. and its territories for a minimum of 330 full days during a 12-month period, he or she was allowed in 2016 to exclude up to $101,300 of foreign earned income from their declared income. The amount that can be excluded is adjusted every year.

Military personnel who are on active duty in declared combat zones also may exclude certain income from their gross income. This applies for each month or part of a month that they are in a combat zone, or if they are hospitalized as a result of injuries arising from service in the combat zone.

Other items of exclusion tax income include certain benefits received from insurance, disability, injury or similar payments. Also excluded are benefits arising from disaster relief payments, federal subsidies and certain retirement income.

Exclusion tax examples

If you live and work in another country for an uninterrupted period of more than a year coinciding with the U.S. tax year, you are entitled to claim exclusion tax.

However, if you periodically return to the U.S. to see your family while on leave and aren’t out of the country for 330 full days, you cannot claim exclusion tax.

If your home is destroyed in a declared national disaster, money you receive from federal funds toward rebuilding your home also is considered to be exclusion tax.

Do you think you are eligible for exclusion tax? Use our Tax Center to discover the tax breaks you qualify for.