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Foreign Earned Income Exclusion (FEIE): A Guide for U.S. Expats
Nov.15, 2021
The Foreign Earned Income Exclusion (FEIE) is a helpful money-saving policy that you should get acquainted with if you are an expat. One of your main tax worries as an expatriate will be the prospect of paying taxes to the United States on income made in another country. Thankfully, the United States provides several tax benefits that you may use to minimize and/or eliminate any liabilities you may have. The Foreign Earned Income Exclusion via Form 2555 is one of the most important benefits accessible to individuals earning money abroad.
Understanding the Foreign Earned Income Exclusion (FEIE)
The Foreign Earned Income Exclusion, or FEIE, is a tax break that exempts a specific amount of foreign-earned income from US taxation.
As a U.S. related person, the Internal Revenue System (IRS) of the United States may tax your international revenue. If you are an American ex-pat, you may be taxed twice on this income, both by the earnings you get from a foreign country and then again by the IRS.
What Is the Amount of Foreign Earned Income Exclusion?
The FEIE sum is indexed for inflation each year. This can often be confounding since early predictions of the new FEIE threshold may underestimate or exceed the allowable excludable value.
For 2020, the Foreign Earned Income Exclusion limit was $107,600. The FEIE ceiling for 2021 is $108,700.
|
Tax Year |
Amount |
|
2021 (filed in 2022) |
$108,700 |
|
2020 (filed in 2021) |
$107,600 |
|
2019 (filed in 2020) |
$105,900 |
|
2018 (filed in 2019) |
$103,900 |
|
2017 (filed in 2018) |
$102,100 |
How to Qualify for the Foreign Earned Income Exclusion (FEIE)
You may be eligible for the foreign earned income exclusion and the foreign housing exclusion if you fulfill certain conditions. To qualify, you must have foreign earned income, have your tax home in a foreign nation, and meet one of the subsequent criteria as per the IRS.
- You must be a U.S. citizen who has been a lawful resident of a foreign country or countries for a continuous period that covers the whole tax year,
- A U.S. resident alien who is a citizen or national of a nation by which the U.S. has an income tax treaty in effect and who has been a legitimate resident of a foreign country or countries for a continuous period spanning the whole tax year, or
- A U.S. citizen or a U.S. resident alien who is physically present at least 330 full days in a foreign country (or countries) within any 12-month period.
How to Qualify for the FEIE Using the Physical Presence Test
To be eligible for the FEIE and save funds on their US tax return, the Physical Presence Test (PPT) is one method U.S. expats can use.
You must have the following to pass this test:
- Earned income from a foreign country. This includes a salary, wages, bonuses, and self-employment earnings. This excludes dividends, interest, pension payments, and capital gains.
- A “Tax Home” in a Foreign Country. When seeking to qualify for tax advantages, this is frequently misinterpreted, but a "tax home" is where someone is indefinitely engaged in employment - regardless of where their actual abode is. To create a "tax home," you must have a job that will last at least a year. If you have a personal residence (abode) in the United States, you cannot be regarded to have a tax home in another nation.
- Been physically present in a foreign country for the required period. This phase lasts 330 days out of a 365-day year. This does not have to be on a calendar-year basis but can be modified over a two-year period if necessary. It is crucial to note that you must spend 330 complete days in the foreign nation, since partial days and transit time do not qualify. If you intend to use the PPT, you must carefully log travel days and be prepared to present data to the IRS if asked.
How to Qualify for the FEIE Using the Bona Fide Residence Test
The Bona Fide Residence Test is an alternative to qualifying with the PPT. You must have the following to use this test:
- Foreign Earned Income. You must have income earned in a foreign country to pass the test and use the FEIE to reduce your employment overseas tax, same as with the PPT.
- A “Tax Home” in a foreign country. You must have a “tax home” by having a professional engagement that is likely to last a year or longer and owning a personal residence in the United States indicates you do not have a “tax home” in a foreign nation. The same criteria were required to qualify using the PPT.
- Been a Bona Fide Resident for the time specified.. This indicates that you must have been a legitimate resident of a foreign nation throughout the whole tax year. The most crucial component in passing the exam is exhibiting intent to stay in the other nation perpetually with no imminent intentions to return to the US.
Understanding the Terms
Foreign-earned Income
Wages, salaries, professional fees, and other payments paid to you for personal services provided are examples of foreign-earned income. It excludes payments for personal services rendered to a company that are a distribution of earnings and profits rather than reasonable remuneration.
Self-employment Income
An eligible person may claim the foreign earned income exclusion for self-employment income generated in a foreign country. The exempted sum lowers your normal income tax but not your self-employment tax. Furthermore, you may be able to claim the foreign housing deduction rather than the foreign housing exclusion as a self-employed individual.
Not foreign earned income
The following amounts are not included in foreign earned income:
- Income earned as a military or civilian employee of the United States government or any of its organizations
- Compensation for services rendered in international seas or airspace (not a foreign country)
- Income earned after the end of the tax year succeeding the year in which the income-generating activities were executed
- Pay that is not generally taxable, such as the cost of food and accommodations provided for the comfort of your company on their grounds.
- Contributions from a pension or annuity, including social security benefits
Foreign Tax Home
One may have a foreign tax home if you work in a foreign nation and plan to be engaged there permanently instead of momentarily. Unless you labor in a Presidentially declared war zone in aid of the United States Armed Forces, you do not have a foreign tax home if your domicile stays in the U.S.
In conclusion, understanding the FEIE is one thing. Whether or not it applies to you is another. Leaving U.S. soil complicates not only your taxes but also the way you save and invest your hard-earned money. These are specialized fields of expertise and professionals in this area are scarce. Make sure you do your homework and consult the right professionals to avoid costly mistakes.