The Foreign Earned Income Exclusion

US expats are required to file US taxes and report their worldwide income to the United States regardless of the fact that they live abroad. In addition to this requirement based on their US citizenship, US expats are also required to file and pay taxes in the foreign country where they live. This increases the possibility of double taxation on the same income. To avoid this scenario, the IRS has put in place a number of exemptions that expats can claim when they file their US tax return to avoid or minimize the payment of US taxes on their income.

The most commonly used and effective exemptions are:

1. The Foreign Tax Credit: Allows US expats to claim a $1 US tax credit for every dollar of tax that they’ve paid in foreign taxes
2. The Foreign Earned Income Exclusion: Allows expats to exclude approximately more than $110,000 of their income from being taxed in the US

The Foreign Earned Income Exclusion lets expats exclude a portion or all of the income that they have actively earned while living abroad from US taxation. The exact amount increases each year. The maximum foreign-earned income exclusion is:

For 2022: $112,000 per qualifying person

For 2023: $120,000 per qualifying person

For 2024: $126,000 per qualifying person

Who Qualifies to Claim the Foreign Earned Income Exclusion?

To claim the Foreign Earned Income Exclusion, expats must prove that they qualify for this exemption. To qualify for the Foreign Earned Income Exclusion, American Expats must prove that they earn their income abroad in one of two ways.

1. The Bona Fide Residence Test: Prove that you are a permanent or tax resident in a foreign country. This can usually be proved by providing your foreign tax statements, rent and utility statements, permanent residence visa, and the like.
   
   OR
   
2. The Physical Presence Test: Prove that you have spent at least 330 days outside the US in a 365-day period that overlaps with the tax year. If this period isn’t the tax year itself, such as for expats who moved abroad in the middle of a year, you can claim the Foreign Earned Income Exclusion only for the days that do fall within the tax year.

How can you claim the Foreign Earned Income Exclusion?

To claim the Foreign Earned Income Exclusion, expats must file form 2555 when they file their federal income tax return.

Expats get an automatic filing extension to June 15th, and you can claim a further extension until October 15th too, should you need to. This further extension may be useful for expats who moved abroad in the middle of a year and are claiming the Foreign Earned Income Exclusion for a 365-day period that started midway through a tax year.

On the other hand, some expats may use the shorter form called the 2555-EZ.

Who can use Form 2555-EZ to claim the Foreign Earned Income Exclusion?

Expats who want to claim the Foreign Earned Income Exclusion and who have straightforward circumstances can use Form 2555-EZ. Straightforward circumstances include:

• Their total income must be less than the Foreign Earned Income Exclusion limit (For tax year 2023, $120,000)
• All their earned income must be from wages, rather than from self-employment
• They must be claimed for an exact calendar year, rather than for an overlapping 365-day period
• They can’t also claim the Foreign Housing Exclusion or Deduction
• They couldn't have lived or worked in the US for any part of the year that they are claiming the Foreign Earned Income Exclusion for

Expats who meet all of the above conditions can use Form 2555-EZ, rather than the extensive and more complex Form 2555, to claim the Foreign Earned Income Exclusion.

Catch up with your tax filing:

Expats who didn’t realize that they had to file US taxes or FBARs can catch up without facing any penalties using the Amnesty programs: The Streamlined Foreign Offshore Program (SFOP) or the Streamlined Domestic Offshore Procedure (SDOP)

Penalties for not filing US taxes and foreign reports such as FBARs for US expats are extremely costly, and the IRS has access to global banking and much foreign tax information. For these reasons, it is strongly recommended that expats who are behind with their US tax filing catch up at the earliest opportunity before the IRS notices your default and you don't qualify to file under the Amnesty programs any longer.

I'm Here for You

If you need to file your US tax return in the US and claim the foreign earned income exclusion as well as all the deductions, exclusions, and credits that you qualify for, we can get this done right away. If you have more questions or need further guidance on planning your tax strategy, let’s discuss. I'm always happy to provide detailed and personalized guidance through a 1:1 consultation. You may reserve the best day and time for you to meet by contacting me to schedule your consultation.