As you probably know by now, the U.S. requires its citizens to report and pay taxes on all of the income they earn during the year. This includes income from any country.
The Foreign Earned Income Exclusion, or FEIE, is a tax benefit that allows you to avoid double taxation by excluding income earned in a foreign country from your taxable income for U.S. purposes. If you meet the requirements established by the IRS for a given tax year, you will be able to deduct some or all of the income you have earned outside of the U.S. during that tax year. The limit on this deduction changes on an annual basis to reflect inflation.
For tax year 2020, the maximum foreign earned income exclusion is the lesser of the foreign income earned or $107,600 per qualifying person. If you’re married and both of you meet either the bona fide residency test or the physical presence test, you can each claim the FEIE to exclude up to a total of $215,200 for the 2020 tax year.
What Type of Income is Covered by the FEIE?
The FEIE can help reduce or eliminate U.S. taxes on foreign income earned while working abroad, but it doesn’t apply to all sources of income.
This exclusion is only available for earned income and doesn’t apply to passive or investment income such as interest and dividends. Moreover, all income must have been earned in a foreign country to count as foreign earned income.
Foreign earned income includes:
- Self-employment income
The FEIE Requirements
To claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, you must meet all three of the following requirements:
- Your tax home must be in a foreign country.
- You must have foreign earned income.
- You must be either:
- A U.S. citizen who is a bona fide resident of a foreign country of countries for an uninterrupted period that includes an entire tax year,
- A U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year, or
- A U.S. citizen or a U.S. resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.
IRS Form 2555
To claim the FEIE, you must file IRS Form 2555. You cannot exclude or deduct more than your foreign earned income for the year.
In order for the form to be considered timely filed, it must be attached to your income tax return. U.S. expats are generally required to file their returns by June 15th of the following year. An automatic extension can also be filed resulting in additional time to file until October 15th. Due dates that fall on a weekend or holiday are pushed to the next business day.
- If you use the FEIE one year, and stop using it the next, then the IRS will not allow you to use the exclusion for the subsequent five years. This is known as a “passive revocation”.
- Claiming the FEIE will disqualify you from claiming the refundable child tax credit.
- If you use the FEIE, then the amount of the foreign tax credit claimed must be reduced accordingly.
- The exclusion is not valid for investment or other passive income.
- Many expats assume that if they qualify for the FEIE it will be automatically added to their tax filing. To claim the FEIE you must file Form 2555 as mentioned above.
- The FEIE cannot be used to eliminate self-employment tax liability to the U.S. Even if you meet all of the foreign tax exclusion requirements and all of your money is earned overseas. You will still be responsible for paying these taxes. Failing to pay what you owe will result in penalties.
- Employees of the U.S. government can’t claim the foreign income exclusion. However, an employee of a private company under contract with the U.S. government might still be eligible.
Figuring the FEIE can be challenging. Especially, if you can only claim this benefit for a portion of the tax year. It is essential to be aware of what types of taxable income you can exclude as well as the annual exclusion limit. You must also be sure to subtract the amount of your Foreign Housing Deduction. Our team of tax professionals is here to help you file your taxes timely and accurately.