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5 Tips For US Expats: How To Maximize Foreign Earned Income Exclusion

A US citizen living and working abroad can use the Foreign Earned Income Exclusion as a shield against US taxes.

Here is how to maximize the value of the Foreign Earned Income Exclusion (FEIE) in 2018.

This article has been written exclusively for Expat Network by American Expatriate Tax Consultants

Qualifying for FEIE

An individual able to establish that his or her “tax home” is outside of the U.S. by satisfying either the “bona fide residence” test or the “physical presence” test can exclude income earned overseas.

A U.S. citizen will satisfy the “bona fide residence” test if he or she resides in a foreign country for an uninterrupted period that includes the entire tax year.  The test is based on facts and circumstances.  The length and nature of stay overseas are examples of key facts that the IRS may examine.

An individual will qualify under the “physical presence” test if present in a foreign country for 330 full days during any period of 12 consecutive months.  The 330 days need not be consecutive nor in the same tax year.

A citizen’s “tax home” is the locale of his or her place of business or employment regardless of that of a family home provided it is not in the US.

Limitations of FEIE

For tax year 2018, the maximum exclusion is up to $104,100 of salary per qualifying person.  If married and both work abroad and meet either the bona fide residence test or physical presence test, each can choose the foreign earned income exclusion.  Together this can be an exclusion of up to $208,200.

Self-employed persons still must pay 15% in self-employment tax on 100% of net business income. The FEIE does not reduce self-employment tax.

Credits and Other Deductions

A U.S. expat can claim a foreign tax credit (FTC) for foreign income taxes paid. This is especially beneficial in high tax countries. Once the foreign earned income exclusion is chosen, a foreign tax credit or deduction for taxes cannot be claimed on the excluded income.  If a foreign tax credit or tax deduction is taken on any of the excluded income, the foreign earned income exclusion will be considered revoked. U.S. expats can also exclude or deduct from their gross income their housing cost amount in a foreign country provided they qualify under the bona fide residence or physical presence tests.

The Form 2555 (FEIE)

To choose the FEIE, file a U.S. federal income tax return (Form 1040) with Form 2555 attached.  Once the choice to exclude foreign earned income or housing amount is made, that choice remains in effect for that year and all later years unless revoked.

What many expats do not realize is while the FEIE may eliminate the requirement to pay tax, it does not eliminate the obligation to file a tax return. To claim the FEIE a US expat tax return must be filed.

Revoking the FEIE

Revoke an FEIE choice for any tax year by attaching a statement revoking one or more previously made choices to the return or amended return for the first year for which an individual does not wish to claim the exclusion (s).

If an individual revoked a choice and within 5 tax years wishes to choose the same exclusion, he must apply for IRS approval.  The IRS charges a fee for issuing these rulings.

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