If you’re a US expat earning income abroad, it’s important to understand the Foreign Earned Income Exclusion (FEIE) rules and eligibility criteria. The FEIE allows eligible expats to exclude a portion of their foreign earned income from US federal taxation. However, failing to meet the eligibility criteria or violating the FEIE rules can result in hefty penalties and additional taxes owed. In this article, we’ll provide a comprehensive overview of FEIE rules and eligibility criteria for US expats, including information on how to apply, common mistakes to avoid, and additional considerations to keep in mind.
How much income can a US expat exclude?
As of the tax year 2022, a US expat can exclude up to $112,000 of their foreign earned income from US federal income tax under the Foreign Earned Income Exclusion (FEIE).
Who qualifies for the Foreign Earned Income Exclusion?
To qualify for FEIE, US expats must meet certain eligibility criteria. The two main tests used to determine eligibility are the physical presence test and the bona fide residence test.
What is the Physical Presence Test for foreign-earned income exclusion?
The Physical Presence Test requires the taxpayer to be physically present in a foreign country or countries for at least 330 full days during a 12-month period. The 330 days do not need to be consecutive and can be spread out over the 12-month period.
If the taxpayer meets the Physical Presence Test, they may be able to exclude up to $112,000 of foreign earned income for the tax year 2022 from their US federal income tax return.
How many days can an expat be in the US?
The number of days that an expat can be in the US depends on whether they qualify for the Foreign Earned Income Exclusion (FEIE) and which test they use to qualify.
If an expat uses the Physical Presence Test to qualify for the FEIE, they must be physically present in a foreign country or countries for at least 330 full days during a 12-month period. They can spend the remaining days of the year in the US or anywhere else, but if they spend more than 35 days in the US during that 12-month period, they may not qualify for the FEIE using the Physical Presence Test.
If an expat uses the Bona Fide Residence Test to qualify for the FEIE, they must establish that they are a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year. This means that they must establish a permanent residence in a foreign country and intend to stay there for the foreseeable future.
How to Qualify for the Foreign Earned Income Exclusion through the Bona Fide Residence Test?
To pass the Bona Fide Residence Test for the purpose of claiming the Foreign Earned Income Exclusion (FEIE), you must establish that you are a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. This test is designed for individuals who have established permanent residence in a foreign country and intend to stay there for the foreseeable future.
To establish bona fide residence, you must show that you have a “tax home” in the foreign country, which means that you have a regular place of business, employment, or self-employment in the foreign country. You must also show that you have a closer connection to the foreign country than to the United States by meeting several factors such as:
- Your physical presence in the foreign country;
- Your intentions with regard to the length and nature of your stay;
- The nature and extent of your social and business contacts in the foreign country;
- The nature and purpose of your trips to the United States or elsewhere;
- The extent to which you conduct business or have other financial interests in the United States or elsewhere;
- The extent to which you have taken steps to change your status as a U.S. resident (such as obtaining a visa, registering with local authorities, etc.).
To establish your eligibility for the FEIE based on the Bona Fide Residence Test, you must file IRS Form 2555 with your tax return
What foreign income can you exclude with the FEIE?
With the Foreign Earned Income Exclusion (FEIE), eligible US expats can exclude foreign earned income from their taxable income. Foreign earned income includes wages, salaries, and professional fees earned from working in a foreign country. It does not include other types of income, such as investment income, rental income, or pension income.
What is the Foreign Housing Exclusion/Deduction?
The Foreign Housing Exclusion/Deduction is an additional tax benefit that US expats may be eligible for on top of the Foreign Earned Income Exclusion (FEIE). It allows eligible expats to exclude or deduct a portion of their foreign housing expenses from their taxable income. To be eligible for the Foreign Housing Deduction, an expat must meet certain criteria related to their residency, the type of housing expenses incurred, and the amount of those expenses. The purpose of this benefit is to further reduce the tax burden on US expats living and working abroad.
Can I claim the FEIE if I’m self-employed abroad?
Yes, you can claim the Foreign Earned Income Exclusion (FEIE) if you are self-employed abroad and meet the eligibility criteria. Self-employed individuals who work abroad may qualify for the FEIE under either the Physical Presence Test or the Bona Fide Residence Test.
FEIE Rules and Limitations
While FEIE offers valuable tax benefits to eligible US expats, there are certain rules and limitations that must be followed to avoid penalties and additional taxes owed.
One important rule is that FEIE only applies to foreign earned income, which is income earned from working in a foreign country. Other types of income, such as investment income or rental income, do not qualify for FEIE.
Additionally, FEIE is subject to annual limits. For tax year 2022, the maximum FEIE amount is $112,000 per qualifying individual. Married couples filing jointly can each claim the maximum FEIE amount, for a total of $224,000.
It’s also important to note that revoking FEIE can have significant consequences. Once an expat revokes FEIE, they are unable to use it again for the next five years.
Finally, it’s important to properly document and report all income and foreign taxes paid to avoid penalties and audits. Keeping detailed records and seeking professional tax advice can help ensure compliance with FEIE rules and limitations.
Related: Common mistakes to avoid when claiming foreign earned income exclusion?
At 1040 Abroad, we are committed to providing free tax advice to individuals who need help with their US taxes. Our mission is to help expats navigate the complex US tax system and ensure that they are in compliance with all US tax requirements. If you have questions about the FEIE or any other US tax issue, please do not hesitate to contact us. Our team of experienced tax professionals is here to help.