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Foreign Earned Income Exclusion Income can be excluded from taxes when claiming the foreign earned income exclusion. As a U.S. citizen or a resident alien of the United States living abroad, you are taxed on your worldwide income. If you do not reside within the US or its territories or have any US income, you are still required to file an income tax return and pay taxes on your worldwide income, unless you do not meet the minimum filing requirements. Fortunately, you can qualify to exclude from income up to an amount of your foreign earnings that is adjusted annually for inflation. Additionally, you may qualify to exclude or deduct certain foreign housing amounts. But you must file a tax return each year to claim the exclusion or deduction; otherwise you could risk having the IRS disqualify you from claiming the foreign earned income exclusion should you be audited later. What this means is you could potentially be taxed on those earnings both in your foreign country of residence and in the US. Ouch! And don’t forget about potential penalties and interest imposed by the IRS on those unfiled tax returns. The requirements to claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction. There are three tests that must be met, but you must first understand the definition of each test. You must have foreign earned income and You tax home must be in a foreign country and You must be one of the following: A U.S. citizen who is a bona fide resident of a foreign country or 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.
Foreign Earned Income Exclusion - Requirements To claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, you must have foreign earned income, your tax home must be in a foreign country, and you must be one of the following: A U.S. citizen who is a bona fide resident of a foreign country or 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. Changes in the Foreign Earned Income Exclusion The maximum amount of the Foreign Earned Income Exclusion under Internal Revenue Code (IRC) section 911 is indexed to inflation ($100,800 for 2015, $101,300 in 2016, $102,100 in 2017) and 2018 is $104,100. The amount of foreign earned income (and foreign housing costs) excluded from an individual's gross income will be used for purposes of determining the rate of income tax and alternative minimum tax (AMT) that applies to his or her non-excluded income. An individual’s tax on any foreign earned income above the exclusion amount and on any unearned income is computed as if the foreign earned income exclusion was not claimed. The individual's tax will be the excess of the tax that would be imposed if his or her taxable income were increased by the amount(s) excluded, and the tax that would be imposed if his or her taxable income were equal to the excluded amount(s). For this purpose, the excluded amount(s) will be reduced by the aggregate amount of any deductions or other exclusions otherwise disallowed. In many cases this will have the effect of increasing an individual’s U.S. federal income tax to an amount greater than it would have been under prior law.
What types of income are considered foreign earned income? Earned income is defined as pay, either in cash or non-cash form for services provided. It includes:
· The following items could be considered either earned or unearned income.
Income from:
What is not considered foreign earned income?
Late Elections to Claim the Exclusion Usually, you must claim the exclusion either:
However, you can still claim the exclusion after these dates if either:
If you haven't filed returns in prior years, you might be able to exclude your foreign earned income from U.S. tax. This could have the effect of eliminating your tax liability and any penalties and interest that would be assessed.
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