What is FEIE?
The Foreign Earned Income Exclusion (FEIE) allows U.S. taxpayers living and working abroad to exclude a portion of their foreign income from U.S. federal taxes. For 2023, the maximum exclusion is $120,000 (adjusted annually for inflation).
Eligible Income for Exclusion
You can exclude foreign earned income, which includes:
Wages and Salaries
Income earned as an employee of a foreign employer or a U.S. employer abroad.
Examples:
Salary from a foreign company
Bonuses paid for work performed overseas
Self-Employment Income
Income earned through freelance work or running a business abroad.
Key Points:
While the FEIE reduces taxable income, self-employment taxes (Social Security and Medicare) may still apply.
Income That Does NOT Qualify
Some types of income are not eligible for the FEIE, including:
Passive Income
Dividends, interest, capital gains, and rental income.
Employer-Provided Benefits
Value of housing, meals, or other benefits unless part of a foreign housing exclusion.
U.S. Sourced Income
Any income earned from work performed within the United States.
Key Requirements
Foreign Earned Income
The income must be earned in a foreign country.
Tax Home Test
Your tax home must be in a foreign country.
Residency Tests
Bona Fide Residence Test: You must reside in a foreign country for a full calendar year.
Physical Presence Test: You must be physically present in a foreign country for at least 330 full days in a 12-month period.
Unlocking the Foreign Earned Income Exclusion: Are You Eligible?
Eligibility Criteria for FEIE
To qualify, you must meet several conditions. Here’s how to determine if you are eligible:
Foreign Earned Income
You must earn income from work (employment or self-employment) in a foreign country.
Examples of qualifying income: Salaries, wages, bonuses, and business income.
Non-qualifying income: Investment income, pensions, or U.S.-sourced income.
Establish a Foreign Tax Home
Your tax home must be in a foreign country, meaning your primary place of work or business is outside the United States.
You cannot qualify if your tax home remains in the U.S. even while working abroad.
Exception: Military and government employees stationed abroad are not eligible.
Residency Tests
Bona Fide Residence Test: Be a bona fide resident of a foreign country for a full tax year (January 1–December 31).
Physical Presence Test: Spend at least 330 full days in a foreign country within a 12-month period.
File the Correct Forms
To claim FEIE, file the following forms with your U.S. tax return:
Form 2555: Report foreign earned income and residency.
Form 1040: Standard tax return for U.S. citizens.
Special Cases to Consider
Dual-Status Aliens: May qualify if they meet the residency tests while living abroad.
Part-Year Expatriates: Can claim FEIE for the part of the year spent working abroad, pro-rated based on days worked.
Foreign Tax Credit vs. Foreign Earned Income Exclusion
Choosing Between the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC)
Choosing between the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC) is a critical decision for U.S. taxpayers living abroad. Key Consideration: Switching back to the FEIE after choosing FTC involves a complex and expensive process with the IRS.
Key Differences: FEIE vs. FTC
Foreign Earned Income Exclusion (FEIE)
What It Does: Excludes up to $120,000 (2023 limit) of foreign earned income from U.S. federal tax.
Limitation: Does not apply to investment or passive income.
Foreign Tax Credit (FTC)
What It Does: Offsets U.S. taxes by claiming a dollar-for-dollar credit for taxes paid to a foreign government.
Form Required: File Form 1116 to claim the FTC.
When Foreign Tax Credit Might Be Better
Higher Foreign Tax Rate: You pay foreign taxes higher than your U.S. tax rate.
Retirement Savings: You wish to contribute to an Individual Retirement Arrangement (IRA). Excluded income under FEIE does not qualify for IRA contributions.
Family-Related Credits: Claiming family-related credits like the Child Tax Credit or Earned Income Credit requires non-excluded income.
Passive or Investment Income: FTC can be applied to dividends, interest, or rental income, which are not covered under FEIE.
Understanding the Foreign Housing Exclusion & Deduction
Foreign Housing Exclusion & Deduction: Explained
The Foreign Housing Exclusion applies to employees, allowing them to exclude certain housing expenses paid with employer-provided income from their taxable income.
The Foreign Housing Deduction, on the other hand, is designed for self-employed individuals, letting them deduct eligible housing expenses directly from their income.
Eligible expenses include rent, utilities (excluding phone), and even certain furniture rentals.
Both benefits aim to offset the high cost of living in many foreign countries, making it easier for U.S. taxpayers to work abroad.
The maximum limit for these exclusions varies by location and is based on the cost of living in your foreign city.
To claim these benefits, you will need to file Form 2555 alongside your tax return.
Proper documentation of expenses is essential to ensure compliance and avoid IRS issues.
