Common Mistakes to Avoid when Claiming Foreign Earned Income Exclusion

Apr 7, 2023

Claiming the Foreign Earned Income Exclusion (FEIE) is one of the most popular tax benefits for US expats. The FEIE allows you to exclude a certain amount of your foreign earned income from US federal income tax. However, there are common mistakes that US expats make when claiming the FEIE.

Mistake 1: Thinking you don’t need to file a US tax return

The first mistake that US expats make is assuming that they don’t need to file a US tax return or have taxable income because they are below the threshold. It is important to note that US citizens and residents must file a tax return and report all worldwide income, regardless of their income level. The FEIE is a tax benefit that allows you to exclude foreign earned income from your taxable income, but you still need to file a tax return.

Mistake 2: Believing you don’t have to report foreign earned income on your tax return

The second mistake that US expats make is not reporting their foreign earned income on their tax return. Even if you qualify for the FEIE, you still need to report your foreign earned income on your tax return.

Mistake 3: Using the FEIE exclusively and missing out on other tax benefits

Many US expats miss out on tax-deductible IRA contributions and the refundable additional child tax credit because they don’t realize they can still claim these benefits if they use the Foreign Tax Credit (FTC) instead of the Foreign Earned Income Exclusion (FEIE).

Tip!

When you claim the FEIE, you are only excluding your foreign earned income from US federal income tax, and not other types of income like investment income or rental income. This means that if you exclude all of your foreign earned income using the FEIE, you may not have any earned income left over to claim other tax benefits, like tax-deductible IRA contributions or the refundable additional child tax credit of $1,400.

However, if you use the FTC instead of the FEIE, you can still claim tax benefits that are based on your total income, including your foreign earned income and any other income you may have earned. This means that if you have other sources of earned income besides your foreign earned income, you can still claim tax-deductible IRA contributions and the refundable additional child tax credit.

It’s important to note that the rules for claiming these benefits are the same regardless of whether you use the FEIE or the FTC. You must have earned income in order to claim these benefits, and they are not available if you exclude all of your earned income using the FEIE.

Mistake 4: Not Understanding the limitations of FEIE

Another common mistake is not understanding the limitations of the FEIE. For example, if you revoke the FEIE, you cannot use it for another five years. Therefore, it is important to consider your future plans before claiming the FEIE. Also, keep in mind that the FEIE only applies to foreign earned income, not to other types of income, such as investment income or rental income.

Lastly, many US expats make the mistake of assuming that the FEIE is the only tax benefit available to them. In reality, there are other tax benefits, such as the Foreign Tax Credit, that may be more advantageous for your specific situation. It is important to understand all of your options before deciding which tax benefit to claim.

In conclusion, claiming the FEIE is a great tax benefit for US expats, but it is important to avoid common mistakes when claiming it. Always remember to file a tax return, report your foreign earned income, consider your future plans, and explore all of your tax benefit options. By avoiding these mistakes, you can maximize your tax savings and avoid any potential penalties or audits from the IRS.

We offer free tax advice via email to help all US expats understand international tax laws. Whether you’re a client or just reading our blog, our expert tax professionals are ready to assist you. Contact us with any questions or concerns about double taxation or reducing your tax liability. We’re committed to providing accurate and timely information to help you navigate these complexities.

Written by

Kasia Strzelczyk, EA

A certified accountant and IRS enrolled agent with over 8 years of experience working with US expats. With a deep understanding of the unique financial challenges faced by expats, Kasia is dedicated to helping clients navigate complex tax laws and regulations.

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