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At a Glance
Main takeaway: The Foreign Earned Income Exclusion (FEIE) and Foreign Housing Exclusion are special elected tax benefits available for U.S. citizens and permanent residents residing and working abroad who meet the qualification requirements. Essentially the exclusions reduce the amount of foreign earned income subject to U.S. tax. In many cases claiming the exclusions results in no tax on foreign earned income.
Who Qualifies
You qualify to exclude your foreign earned income from gross income if both of the following apply.
- You meet the tax home test
- You meet either the bona fide residence test or the physical presence test
Good to Know: The initial election must be made on a timely filed tax return on Form 2555. Not everyone will benefit from claiming the exclusions. Frequently, taxpayers who reside in a high tax country can achieve a lower tax liability by claiming the foreign tax credit only. Calculations should be performed to determine if claiming the exclusions results in a lower tax. A professional expat tax firm such as SmileTax can help you determine the best filing position for your particular tax situation.
In Depth
Foreign Earned Income Exclusion (FEIE)
If your tax home is in a foreign country and you meet the bona fide residence test or the physical presence test, you can choose to exclude from your income up to $120,000 (2023) of your foreign earned income. Foreign earned income is pay for personal services performed, such as wages, salaries, or professional fees, in a foreign country. Pay for personal services performed in the U.S. isn’t foreign earned income.
Foreign Housing Exclusion: A Valuable Addition
In addition to the FEIE, the Foreign Housing Exclusion provides further tax relief by allowing eligible taxpayers to exclude certain housing expenses exceeding a standard base amount from their taxable income. Eligible foreign housing costs include rent, utilities, and other expenses.The amount of qualified foreign housing expenses eligible for the housing exclusion is limited.The standard limit of $36,000 (2023) is generally 30% of the maximum foreign earned income exclusion (computed on a daily basis), multiplied by the number of days in your qualifying period that fall within your tax year. A qualified individual incurring housing expenses in a high-cost locality during 2023 can use housing expenses that total more than the standard limit. The limits for high cost localities are listed in the instructions for Form 2555.The amount of the exclusion allowed is the lesser of actual expenses or the standard/high-cost limitation less the base amount of $19,200 (2023).
Tax Home Test
To meet this test, your tax home must be in a foreign country, or countries throughout your period of bona fide residence or physical presence, whichever applies.Your tax home is your regular or principal place of business, employment, or post of duty, regardless of where you maintain your family residence. If you don’t have a regular or principal place of business because of the nature of your trade or business, your tax home is your regular place of abode (the place where you regularly live).You aren’t considered to have a tax home in a foreign country for any period during which your abode is in the United States.
Bona Fide Residence Test
To meet this test, 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
You do not automatically acquire bona fide resident status merely by living in a foreign country or countries for 1 year. If you go to a foreign country to work on a particular job for a specified period of time, you won’t ordinarily be regarded as a bona fide resident of that country even though you work there for 1 tax year or longer. The length of your stay and the nature of your job are only two of the factors to be considered in determining whether you meet the bona fide residence test. The IRS considers your intention, the type of work, and the length of stay when determining eligibility.
Physical Presence Test
To meet this test, you must be a U.S. citizen or resident alien who is physically present in a foreign country, or countries, for at least 330 full days during any period of 12 months in a row. A full day means the 24-hour period that starts at midnight.
To figure 330 full days, add all separate periods you were present in a foreign country during the 12-month period. The 330 full days can be interrupted by periods when you are travelling over international waters or are otherwise not in a foreign country.
The physical presence test is based only on how long you stay in a foreign country or countries. This test doesn’t depend on the kind of residence you establish, your intentions about returning, or the nature and purpose of your stay abroad. However, the tax home test must still be met.
The Bottom Line
Maximizing the benefits of the Foreign Earned Income Exclusion and Foreign Housing Exclusion requires careful planning and a thorough understanding of the requirements. Calculations should be performed to determine if claiming the exclusions results in a lower tax. A professional expat tax firm such as SmileTax can help you determine the best filing position for your particular tax situation.
FAQs
What is the maximum exclusion amount for the FEIE?
- For 2023, the maximum FEIE is $120,000 of foreign earned income.The maximum exclusion is annually adjusted for inflation so it is expected the 2024 exclusion will be higher than this amount.
Can I qualify for the FEIE if I work remotely for a U.S. company?
- Yes, definitely, as long as you meet the requirements.
What if I don’t meet the 330-day requirement by December 31?
- You can file for an extension using Form 2350 to allow more time to meet the Physical Presence Test.
I’m self-employed? Can I claim the exclusions?
- Generally, self-employed individuals may claim the foreign earned income exclusion. However, self-employed individuals claim the foreign housing deduction instead of the foreign housing exclusion. See the Form 2555 Instructions for more information.
I’m a U.S. government employee based in a foreign country. Can I claim the exclusions?
- No, U.S. government employees paid by the U.S. government are not eligible for the exclusions.
For More Information:
Form 2555 – Foreign Earned Income
IRS Publication 54 – Tax Guide for U.S. Citizens and Resident Aliens Abroad
Form 2350 – Application of Time
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