Show Foreign Earned Income Exclusion: When a U.S. person works overseas and meets the necessary IRS requirements, they may be able to exclude a portion of their foreign income and housing from their US taxes. There are very specific requirements in order to take advantage of this role. One common misconception is that if a person qualifies, then they do not have to include the income on their tax return, but it is not as simple as just eliminating the foreign income from the tax return. Rather, it requires establishing the elements of either the Physical Presence Test or the Bona-Fide Resident Test. In addition, it requires the show that the person has a tax home outside of the United States and other specific requirements. We will summarize the basics of the foreign earned income exclusion and explain why there is a higher risk of audit. What is the Foreign Earned Income Exclusion?When a person is a U.S. person who resides overseas and meets either the physical presence test or the bona fide resident test (and can prove the foreign country is their tax home), they may qualify to exclude a portion of their foreign income, using Form 2555. In addition, a person may also be able to deduct a portion of their housing in accordance with the foreign housing deduction as well. What if No Foreign Taxed Paid?One nice thing about exclusion is that it does not matter if a person paid tax or not in a foreign country, as is required to claim a Foreign Tax Credit. Unlike the foreign tax credit, a person may qualify for the foreign earned income exclusion even if they reside in the country and did not owe any foreign income tax. As provided by the IRS:
Physical Presence Test (PPT)In order to meet the PPT (Physical Presence Test), a person must reside outside of the U.S. for 330-days over a 12-month period. It is informally referred to as a “Counting Days” test. As provided by the IRS:
Bona-Fide Residence Test (BFR)The Bona-Fide Residence Test is the more difficult of the two tests, and requires more than just counting days. As provided by the IRS:
Tax HomeOne of the absolute requirements for the Foreign Earned Income Exclusion is that the Taxpayer has a foreign country as a Tax Home. As provided by the IRS:
Do Government Employees Qualify?Unfortunately, employees of the U.S. Government do not qualify.
Combat Zone Exception The U.S. government has integrated an exception to the FEIE limitation, which is for service in a combat zone:
*For a list of IRS recognized combat zones, go to IRS.gov/ Newsroom/Combat-Zones.” Can Both Spouses Claim the Exclusion?Yes. If spouses file their tax returns Married Filing Jointly, they can still each claim the foreign earned income exclusion. What about Housing?You can claim a certain portion of the housing, which is summarized in a separate article. We Specialize in Streamlined & Offshore Voluntary DisclosureOur firm specializes exclusively in international tax, and specifically IRS offshore disclosure. Contact our firm today for assistance. |