Foreign Earned Income Exclusion Information For US Citizen Expats
Updated: May 16, 2022
Nobody should pay more taxes than they are obligated to. US citizens and green card holders living abroad have to file a US tax return each year should they meet the minimum threshold for an income tax filing requirement. However, they are ways to avoid double taxation if you are required to file and pay taxes in other countries and in the US. One of the ways U.S. expats can reduce their tax bill is by using the Foreign Earned Income Exclusion (FEIE). For many expats, the FEIE is a lifesaver because it can lower, if not completely eliminate, their US tax liabilities. Review the Foreign Earned Income Exclusion information below so you know what to expect on tax day. By the way, the tax deadline for expats living abroad is generally June 15. But taxes must be paid by April 15 to avoid interest, if applicable. The IRS may not assess a late payment penalty on the tax due, if any, until after June 15. A request for an extension to file on Form 4868 must be submitted before June 15 to avoid late filing penalties.
Foreign Earned Income Exclusion 2020 Updates
If you are a U.S. citizen or a resident alien of the United States and you live abroad, you are taxed on your worldwide income. However, you may qualify to exclude from earned income up to an amount of your foreign earnings that is adjusted annually for inflation.
Each year, the IRS adjusts the maximum amount of the FEIE to account for inflation. For the 2019 tax year, the maximum was $105,900. However, the Foreign Earned Income Exclusion 2020 maximum amount has risen to $107,600. That means that the first $107,600 of your 2020 foreign earned income can be excluded from taxation.
Foreign earned income not eligible for the exclusion
It's important to note that certain foreign income does not qualify for the Foreign earned income exclusion. The IRS lists the following types of income as not covered by the FEIE:
Pay received as an employee of the US government or a related agency
Pay for work in international waters
Pay in specific combat zones
Payments received after the end of the tax year in the subsequent year that services were performed
The value of meals and lodging that are excluded from income because it was furnished for the convenience of the employer
Pension or annuity payments, including benefits such as social security.
This is not a complete list of income that doesn't qualify for the FEIE.
Qualifying for the Foreign Earned Income Exclusion
In order to use the exclusion, you must qualify either by using the bona fide residence (BFR) or physical presence test (PPT).
To use the bona fide residence test, you’ll need to have been in another country for the full calendar year.
To use the physical presence test, you need to have been in a foreign country for 330 days in a consecutive 12-month period. The 12-month period can start or end in the year in which you are taking the foreign income exclusion. You also get to choose which 12-month period that is the most beneficial to you and gives you the most qualifying days.
Even if you are unable to qualify using the physical presence test the first year and you are living overseas, other options may be available to you, depending on your individual situation. For example, you can take the FEIE using the bona fide residence test. Depending on your individual situation, you must file an extension, wait until you meet the one full year residency rule outside of the US and then file a tax return using the BFR. This creative way is generally overlooked by many taxpayers that are not well informed about expat tax rules.
Taking the Foreign Housing Exclusion
If you qualify using either the physical presence or bona fide residence test, you may also be able to use foreign housing deduction to limit your tax liability even further! The foreign housing exclusion allows you to exclude qualified housing expenses like rent, utilities, or repairs from taxation. Mortgage loan payments are not part of housing expenses.
The foreign housing expenses may not exceed your total foreign earned income for the taxable year. Your foreign housing deduction cannot be more than your foreign earned income minus the total of your (1) foreign earned income exclusion, plus (2) your housing exclusion.
Although the foreign housing exclusion and/or the deduction will reduce your regular income tax, they will not reduce your self-employment tax.
Your housing expenses must be over a base amount and may not exceed a certain limit. The current base amount is 16% of the current year maximum FEIE amount. For 2019, the base amount was 16% of $105,900 = $16,944. The limit on housing expenses varies depending upon the location in which you incur the housing expenses. The instructions of the Form 2555 provides the daily and annual limit amount based on the city where the expenses were incurred.
How to Claim the Foreign Earned Income Exclusion
If you qualify for the FEIE, in order to use it, you’ll need to complete Form 2555. Attach completed Form 2555 to your Federal Tax Return Form 1040 if you are taking the FEIE and you are good to go!