Foreign Earned Income Exclusion: What You Should Know

Are you a United States citizen that has earned, or plans to earn, income abroad? If so, there is a wealth of important tax information that you need to know — starting with the fact that all U.S. citizens are required to report all of their income, regardless of the location where it was earned. The good news is that you may be eligible to benefit from the Foreign Earned Income Exclusion, one of the largest tax benefits available to those who earn income outside of the United States.

What Is The Foreign Earned Income Exclusion?

The Foreign Earned Income Exclusion (“FEIE”) is a tax benefit for United States citizens that are working abroad. With the FEIE, you may be eligible to deduct a certain amount of your income and housing expenses. The exclusion only applies to earned income and not passive income, and in 2015, the amount was as high as $100,800. It should be noted that you cannot be eligible for the FEIE if you are a federal employee or a member of the military. In order to qualify for the FEIE, you must pass one of two tests:

1.) Bona Fide Residence Test – You work full time inside a foreign country for an entire calendar year

2.) Physical Presence Test – You work outside of the United States for at least 330 of any 365-day period

At first glance these criteria may seem similar, but it is best to consult a knowledgeable tax attorney to ensure you fully meet one of the criteria.

Common Issues & Concerns

While it may seem that the criteria above are relatively straightforward, there are several things that can prevent you from qualifying for the FEIE. As mentioned before, you may not qualify for the FEIE if you are a United States federal employee or a military employee.

Additionally, you may not qualify if you are self-employed. Certain exceptions do exist, but generally those that are self-employed will not be able to take advantage of the FEIE. The IRS has recently trained heavily on this issue and is making it a priority. We have seen it in several examinations this past year in 2018. Even worse, is that it sometimes leads to issues of undisclosed foreign assets (like foreign bank accounts) and foreign reporting (Form 5471 disclosing foreign corporation). You should always consult a tax attorney or tax expert to ensure you are taking advantage of every tax benefit available to you while you are working and living abroad.

How Can I Claim The Foreign Earned Income Exclusion?

In order to claim the FEIE, you will use a Form 2555.  This form will give you options for which foreign tax benefit you would like to utilize.  Keep in mind, you generally cannot utilize more than one foreign tax benefit.

Check with your tax attorney or tax expert on how to properly file for the FEIE.  Remember that you may also be eligible to claim a deduction or exclusion on your housing expenses!  In addition to the FEIE, make sure you and your tax specialist review any other international or foreign tax documents you may also need to file.