For our U.S. citizen clients who also earn income while abroad, certain questions keep cropping up:
“What is the foreign earned income exclusion?”
“Is income from abroad taxable?”
“How do I report foreign income?”
Let’s make one thing clear right away: If you are a United States citizen (or a resident alien), but you live and/or work outside of the country, you are still taxed on your income no matter where you earned it. It’s important that you stay compliant and meticulous in your handling of this income for tax reasons. In fact, if you earn significant income while abroad, you should strongly consider retaining a tax attorney to ensure that you do not breach your obligations as a taxpayer and end up owing vast sums in back taxes and fees/penalties.
With all that said, there is one element of the tax code that you would be wise to become familiar with: the foreign income tax exclusion. This rule allows you to deduct housing costs and a percentage of your earned foreign income (adjusted annually for inflation).
This is an extremely useful tool for taxpayers abroad, but keep in mind: this exclusion does not apply to U.S. Government pay, combat pay, income earned after the end of the tax year from which you are claiming, and social security/pension/annuity benefits. The foreign income tax exclusion could apply to certain government contractors including military contractors.
Taxpayers must be vigilant in timely filing returns and attachments, but there may also be extension for individuals who did not file Form 2555 depending on the facts and circumstances. If you’re unsure about whether a certain kind of income qualifies for the exclusion, you should definitely contact a tax attorney to clarify.
Questions about earned foreign income and potential exclusions or deductions? Contact Abajian Law today for a discreet, no-obligation consultation regarding your specific financial situation at 818-396-5059.
In order for the foreign income tax exclusion to work for your benefit, you have to meet a few general requirements. First of all, it’s a baseline requirement that you have a tax home in a country other than the United States, while also collecting foreign-earned income. You’ll need to be able to pass at least one of the “bona fide residence test” and/or the “physical presence test.”
You’ll use Form 2555 to actually claim the exclusion, which will be attached to your normal 1040. Additionally, keep in mind that deciding between the foreign earned income exclusion option and other foreign tax credits/deductions is an “either/or” choice. You cannot combine these two options and still remain in compliance with your obligations as a taxpayer.
Also, anytime you’re doing business in a foreign country, be mindful of other filing requirements such as an FBAR, Form 8938, and other relevant international tax returns.
Still have questions about your foreign earned income and whether or not you should take the exclusion or go the route of foreign tax credits and deductions? Contact an experienced, veteran tax attorney at Abajian Law today by calling 818-396-5059.
Professional Tax Representative
September 23, 2022