Unlike most other countries, the US tax system includes worldwide income taxes by all Americans regardless of their location across the world. If you’re an ex-pat and meet the minimum worldwide income thresholds, you’re automatically required to file US taxes. The good news is that you can be excluded from paying taxes on your foreign earned income if you meet certain requirements. Some of the benefits you can claim include Foreign Earned Income Exclusion (FEIE) and/or Foreign Housing Exclusion (or Deduction). However, US taxes for ex-pats can be complicated, and you may need to work with experienced tax advisors such as your accountant, your IRS agent, or your local office, depending on your tax needs. Transmitting your tax documents and other confidential documents to them will no doubt require a fast, reliable, and secure transmission method such as fax. This is where a trusted and reliable partner such as Enterprise Fax Solutions comes in handy in managing your fax environment.
What is Foreign Earned Income Exclusion (FEIE)?
The Foreign Earned Income Exclusion (FEIE) is an IRS exclusion benefit accorded to American ex-pats. It enables them to avoid double taxation by reducing or doing away with their US tax bill. The FEIE benefit is based on the assumption by the IRS that ex-pats are already taxed in the respective foreign countries they earn their income. You’ll want to get familiar with FEIE if you’re an American citizen working overseas. It’s one of the most common and widely used tax benefit plans for Americans working overseas and allows them to exclude all or a certain amount of their foreign earned income from their US taxes.
The income threshold limit, set at $100,000, is adjusted for inflation and rises slightly each subsequent year. For instance, as of 2021 (filed in 2022), the exclusion limit is $108,700. The exclusion limit for 2022 (filed in 2023) will be $112,000. If you’re married and live with your spouse abroad, you can each qualify for Foreign Earned Income Exclusion (FEIE), assuming you both meet the stipulated earning threshold, among other requirements. However, it’s crucial to note that Foreign Earned Income Exclusion (FEIE) does not apply to all types of income, such as passive or investment income like interest and dividends. The exclusion may only apply to earned income such as;
- Self-employment income
All the above income categories MUST have been earned abroad to count as foreign earned income. You should also note that ex-pats working in countries that do not levy a tax on income (such as the UAE) can also qualify for FEIE.
Who can Qualify for Foreign Earned Income Exclusion (FEIE)?
To qualify for Foreign Earned Income Exclusion, you must demonstrate that your tax home is in a foreign country by meeting one of the three criteria below as defined by the IRS;
- You are a US citizen and a bona fide resident of a foreign country (or countries) for an uninterrupted entire tax year.
- You are a US resident alien and a citizen of a country with an effective income tax treaty with the US and is a bona fide resident of a foreign country (or countries) for an uninterrupted entire tax year.
- You are a US citizen or resident alien working in a foreign country for at least 330 full days of any 365 consecutive days (known as the Physical Presence Test).
Qualifying for FEIE through the Bona Fide Residence Test
To qualify for Foreign Earned Income Exclusion through the Bona Fide Residence Test, an ex-pat has to prove that they have been residing in a foreign country for an uninterrupted period culminating in an entire tax year. This can be ascertained by one providing a permanent residency visa, providing proof of paying foreign income taxes in the specified foreign country, or proof of housing (along with utility bills in their name). Anytime the ex-pat travels to the US for any reason, they must always have the intention of returning to their foreign country of residence.
Qualifying for FEIE through the Physical Presence Test
Under the Physical Presence Test, an ex-pat must prove that they have been residing outside the US for 330 full days within a period coinciding with a given tax year. However, there is an allowance for those who moved to a foreign country or back to the US mid-year to claim FEIE for part of the year as long as they spent 330 full days abroad.
It’s always recommended that ex-pats consult a US ex-pat tax expert for their specific situations to avoid common catches regarding FEIE. Some of the most common pitfalls include failure to file Form 2555. FEIE is not automatically added to an expats tax filing unless they claim it by filing Form 2555. Great care should also be exercised when tracking your time. Incorrect time tracking could easily bungle your FEIE qualifications, even being off by a few hours.