When you’re a U.S. expat, it’s important to take advantage of any tax relief measures that are available – and one of the most popular is the Foreign Earned Income Exclusion (FEIE). Qualifying for this means you may exclude part of or all of your foreign wages when filing your U.S. income tax return, therefore avoiding or partially avoiding double taxation.
However, it’s important to bear a few things in mind when applying for this foreign income exclusion, including:
1. The Foreign Earned Income Exclusion Requirements
As long as you’re able to prove that your “tax home” isn’t in the U.S. and you can satisfy the physical presence test or the bona fide residence test, you can exclude a portion of the income you’ve earned overseas from your expat taxes.
Your “tax home” is regarded as the main place of your post of duty, employment, or business, regardless of where your “family home” is located. This tax home is where you’re indefinitely or permanently engaged to work as a self-employed individual or employee.
In order to qualify for the physical presence test, you must be living in a foreign country (or foreign countries) for a total of 330 full calendar days over 12 consecutive months. Even though these 330 days have to be in the same tax year, they don’t have to be consecutive.
Alternatively, the bona fide residence test is satisfied if you reside in a foreign country or countries uninterrupted for a certain period of time which includes a full tax year. However, there are also some additional stipulations in place that mean you don’t automatically qualify if you’ve been living in a foreign country for a year.
Instead, to acquire bona fide resident status, your application will be viewed on a case-by-case basis, taking into account certain things such as the length and nature of your trip abroad, and the purpose or intention of your trip. Other factors include whether you’ve purchased a home over there, any declarations you’ve made to the foreign country that indicate you aren’t a resident of it, and whether or not you have family living with you.
2. The Foreign Earned Income Exclusion Limitation Amount
The limitation amount for FEIE is adjusted every year to allow for inflation. For example, 2015’s tax year had a total exclusion amount of $100,800 for each person who qualified. If you are married and you and your spouse work abroad and meet the criteria of one of the aforementioned tests, you can both choose the FEIE. This means that you can exclude a total of $201,600 together for the 2015 tax year.
In addition, you may also want to claim for a Foreign Housing Exclusion or Deduction from your gross income (if you qualify for the physical presence test or the bona fide residence test and your tax home is located in a foreign country).
The housing exclusion only applies to amounts that are considered to be paid for with amounts provided by your employer/employment. Equally, the housing deduction is only applicable when you’ve paid amounts through your self-employment income.
3. The Foreign Earned Income Exclusion Form
In order to opt for FEIE, you must file your standard U.S. federal income tax return along with Form 2555, which you attach to your return. After choosing to exclude your housing amount or foreign earned income, this remains in effect for that particular tax year and any future years, unless you choose to revoke it.
What many don’t realize is that even though you may eliminate your need to pay tax through the FEIE, this doesn’t eliminate your need to file a U.S. tax return. In fact, in order to make a claim for your FEIE, you’ll need to file the tax return – and if you don’t file it on time, you may be prevented from making a claim.
4. Revoking the Foreign Earned Income Exclusion
If you wish to revoke your FEIE claim for a tax year, you can do this by attaching a statement that declares your wish to revoke your choice. You must indicate which of your choices you would like to revoke, and must include a separate statement for foreign housing amounts and foreign earned income.
If you revoke your choice and wish to apply for the same exclusion within 5 tax years, you’ll need to apply to the IRS for approval. There are charges for these rulings.
In conclusion; if you’re a U.S. citizen or resident alien of the U.S. who’s living in a foreign country, your “worldwide income” will be taxed. Even if you don’t reside in the U.S. anymore, you’ll still need to file a U.S. tax return before paying any taxes owed on your worldwide income (unless you are below the minimum filing requirements).