Posted by James Financial Services Inc

Foreign Earned Income Exclusion

Foreign Earned Income Exclusion

As a U.S. citizen or U.S. Resident Alien, you must pay taxes on your worldwide income. Suppose you are not a resident of the United States or its territories or have income in the United States. In that case, you still have to file an income tax return and pay taxes on your aggregate income unless you meet the minimum filing conditions.

Fortunately, you may be eligible to exclude from your income up to an amount of your foreign income that is adjusted annually for inflation. Also, you may have the right to exclude or deduct certain amounts of accommodation abroad. But it is necessary to file a tax return every year to claim an exclusion or a deduction; otherwise, you run the risk of being disqualified by the IRS for requesting the exclusion of income earned abroad if you are subsequently audited. This means that you could pay taxes on this income in your country of residence abroad and the United States. And don't forget about possible penalties and interest imposed by the IRS on unfiled tax returns.


The conditions to claim the foreign earned income exclusion, the foreign housing deduction, or the foreign housing exclusion.

There are three tests to be met, but first, you need to understand each test's definition.

1) You must have foreign income earned.

2) Your tax domicile must be in a foreign country.

3) You must be one of the following:

  • A U.S. citizen or Resident Alien of the United States is physically present in one or more countries for a minimum of 330 full days in 12 consecutive months.

  • A U.S. citizen who is a genuine resident of a country or foreign country for an uninterrupted period, including a full fiscal year,

  • An alien residing in America who is a citizen or national of a country with which the United States has a tax treaty in effect and who is a bona fide resident of one or more international countries for a continuous period that includes a full tax year


Requirements for Foreign Earned Income Exclusion

To claim the foreign earned income exclusion, accommodation abroad, or a deduction for accommodation abroad, you must have income from abroad, your tax domicile must be in a foreign country, and you must be one the of the following:

  • A U.S. citizen or Resident Alien of the United States is physically present in one or more countries for a minimum of 330 full days in 12 consecutive months.

  • A U.S. citizen who is a legit resident of the country or foreign country for an uninterrupted period, including a full fiscal year,

  • An Resident Alien in the United States who is a citizen or a national of a country with which the United States has a tax treaty in force and a genuine resident of one or more countries for a continuous period that includes a full tax year.


Changes to the foreign earned income exclusion.

The maximum foreign earned income exclusion amount under Section 911 of the Federal Revenue Code (IRC) is indexed to inflation ($ 104,100 for 2018, $ 102,100 for 2017, $ 101,300 for 2016, and $ 100,800 for 2015.)

The amount of foreign earned income (and the cost of living abroad) excluded from a person's gross income will be used to determine the income tax rate and the alternative minimum tax (AMT ) that applies to your income. Individual tax on any foreign earned income that exceeds the value of the exclusion and on any income earned is calculated as if the exclusion of income obtained abroad had not been claimed. Personal income tax will be the excess tax that would have been deducted if your taxable income had been increased by the excluded amount and the tax that would have been deducted if your taxable income was equal to the excluded amount(s). For this purpose, the excluded amounts will be reduced by the total amount of any deductions or other prohibited exclusions. In several cases, this will have the effect of increasing a person's federal income tax to a higher amount than would have been the case under the previous law.


What type of income is considered to have been earned abroad?

Earned income is defined as a payment, in cash or otherwise, for services provided. It includes:

  • Commissions

  • Premium

  • Professional fees

  • Salaries and wages

  • The fair market value of the employer's property or facilities in the form of accommodation, food, or the use of a car.

  • Tips

  • Any refund or bonus for the following items:

  • Cost of living

  • Education

  • Family

  • Home leave

  • International differential

  • Moving to a foreign country

  • Quarters

The following may or may not be considered as earned income.

Income from:

  • Business profits from corporations, partnerships, and sole proprietorships 

  • Fellowships and Scholarships and grants

  • Rent

  • Royalties

  • Some fringe benefits 

  • Stock options

What is not considered foreign earned income?

  • Alimony

  • Annuities

  • Any deductions for unauthorized moving expenses that you choose to recapture

  • Capital gains

  • Dividends

  • Gambling wins

  • Interest

  • Meals and accommodation provided for the comfort of your employer and which you excluded from income.

  • Payments received after the end of the fiscal year following the one in which the income-generating services were provided

  • Pensions

  • Social security benefits

  • U.S. government employee income


Late elections to claim the exclusion.

In general, you should request the exclusion either:

  • Within one year of the expiry date of the declaration

  • By amending a timely filed return

However, you can still request an exclusion after this date if:

  • The IRS is yet to detect your failure to file.

  • You do not have to pay taxes after considering the exclusion.

If you haven't filed a return in previous years, you may be able to exclude foreign income from U.S. taxes. This could have the effect of eliminating your tax debt and the penalties and interest imposed.


CLICK THE BLUE TAB ON THIS PAGE TO SEE HOW JAMES FINANCIAL SERVICES, INC. CAN HELP YOU WITH YOUR TAX FILING NEEDS.


THANKS FOR VISITING.

James Financial Services Inc
Contact Member