No matter where you fall on the spectrum of preparedness for filing US taxes as an expat, if you’re planning to join the 9 million Americans¹ who live outside the country, you’re going to have to file. But truly, no judgment. Between choosing a destination, arranging travel, securing housing, packing your bags, and the million little details that go into realizing the dream of living abroad, that once-a-year obligation to the IRS is easy to put on the back burner. 

That said, unless you’re planning to align your move with the IRS’ calendar year (January 1 – December 31), you’ll need to consider the implications moving abroad mid-year will have on your tax filing obligations. 

US taxes and living abroad

US citizens and US residents pay tax on their worldwide income, while non-residents are subject to income tax only if the income is US-sourced or connected with a US business or trade.

If you plan to establish residency abroad as an American expat, there are ways to make sure you’re not taxed twice on the same income (by two different countries). 

Fortunately, it’s also possible to strategically plan your mid-year move so that you qualify for the Foreign Earned Income Exclusion (FEIE). There are two main provisions within the FEIE that allow a taxpayer to claim relief, the Physical Presence Test and the Bona Fide Residence Test. In this article, we’ll be focusing on the Physical Presence Test, or the PPT. 

Save for later: What Is The Bona Fide Residence Test?

How to claim the FEIE using the Physical Presence Test (PPT)

As mentioned, the Physical Presence Test is one of two ways Americans residing outside the US can claim the Foreign Earned Income Exclusion. If this is your first year living abroad, it’s likely easier to use the PPT to claim the FEIE. 

What are the Physical Presence Test requirements?

-Be physically present in a foreign country or countries

-Remain outside of the States for 330 full days during any 365-day period

Qualifying for the FEIE via the PPT sounds simple, but it’s more complex than counting how many days you spend outside the US. That being said, you will want to keep a careful tabulation of the total number of days spent outside the US, because the 330 days don’t need to be consecutive. And, in a stroke of good fortune for those who moved abroad mid-year, the 365-day period doesn’t need to follow the calendar year! 

Note: While you can count the number of days you spend overseas for different reasons (vacation, employment, etc.), some situations would disqualify you from meeting the PPT, specifically:

If your presence abroad violates US law, any income you earn during the violation period won’t qualify as foreign-earned income.

How is the Physical Presence Test evaluated?

To calculate the days required to pass the PPT, you must prove that you were physically present outside of the US:

-For 330 full days 

-In an eligible foreign country

-Within a period of 365 consecutive days

How the IRS defines 330 full days 

US expats trying to file their tax returns commonly ask: “If I live abroad for 330 days, do I automatically qualify for the Foreign Earned Income Exclusion?” 

A full day is 24 consecutive hours (from midnight to midnight), that you spend in a foreign country or countries. This means the day you depart the US or land in a foreign country does not count towards the 330 days

Take careful note: This does not include time spent on or over international waters traveling to and from the US. 

Here is an example of how to count days towards passing the Physical Presence Test

Suppose you’ve embarked on a trip as a digital nomad. You plan to spend several months in Europe and will start your adventure in Italy. 

You leave the US for Italy on August 19, 2022, and arrive in Italy on August 20, 2022, at 7:00 AM. Your first full day in Italy counted for the Physical Presence test is August 21, 2022. 

After a few wonderful months in Italy, you pack up and head to Greece. You catch an 11:00 p.m. flight on December 3, 2022 and arrive in Greece at 4:00 a.m. on December 4, 2022. 

Since your trip took less than 24 hours, and you were not traveling to the US, you can count both December 3rd and December 4th as full days towards your 330-day requirement.

So far, in this example, the total number of days that count towards the 330 required for the Physical Presence Test is 106 days. This also assumes your only travel has been local and has not exceeded 24 hours. At this point, you do not qualify for the FEIE through the Physical Presence Test; you must spend at least another 224 days outside the US.

Common question when calculating days that count towards meeting the Physical Presence Test: What happens if your travel takes longer than 24 hours?

After staying in Greece for three months, you head to New Zealand to take advantage of their working holiday visa. You leave Greece at 11:00 p.m. on March 5, 2023 and arrive in Auckland, New Zealand at 8:00 a.m. on March 7, 2023. Although your travel takes more than 24 hours, March 5, 6, and 7 still count towards the PPT because the travel did occur between foreign countries. At this point, you have spent 200 days total outside of the US – so you still have 130 days to go before you qualify for the FEIE through the Physical Presence Test. 

Fortunately, your New Zealand visa is valid for an entire year. You spend an unforgettable two months working the annual harvest on a famous vineyard in the Marlborough Region, and proceed to slow travel in a campervan down and around the rest of the South Island before making the journey back up to Auckland for a US-bound departure on November 20, 2023, which will have you back home just in time for Thanksgiving. 

At this point, you’ve spent well beyond the 330 days required to qualify for the PPT – but you’ve hypothetically also had to file your 2022 taxes prior to your November departure. How does one calculate which days count towards which filing season? Here is where it becomes tricky, but also possibly, to strategically identify the most advantageous 12-month period from a tax perspective.

How to figure the 12-month period

There are four things to know about the consecutive 12-month period.

1. A 12-month period can begin on any day of the month. 
2. A 12-month period must be made up of consecutive months (e.g., November 15, 2021 to November 14, 2022)
3. You don’t need to start your 12-month period on your first full day in a foreign country, and you don’t need to end it with the day you leave. You can choose the period that gives you the greatest exclusion.
4. If you’re in a foreign country for a longer period (e.g., more than two years), 12-month periods in different tax returns can overlap each other.

Let’s look at the 4th item in more detail with another example that will help lead us into the mid-year move scenario.

Suppose you live and work in Australia from January 1, 2021, through August 31, 2022.

You spend 28 days in February 2021 and 28 days in February 2022 on vacation in the United States. 

You are present in Australia for at least 330 full days during each of the following two 12-month periods: 

-January 1, 2021 – December 31, 2021, and 

-September 1, 2021 – August 31, 2022. 

Your qualifying 12-month period for your 2021 tax return is January 1, 2021 – December 31, 2021.  

For the 2022 tax return, you may choose September 1, 2021 – August 31, 2022, as your qualifying period. 

Moving abroad in the middle of the year

Let’s assume:

-Your first full day living in Australia is September 15, 2021.

-You’re still living in Australia on December 31, 2022.

-You earn $150,000 a year from your Aussie employer.

-The FEIE for 2021 is $108,700 and for 2022 is $112,000.

For the 2021 tax year, you can use the September 15, 2021 to September 14, 2022 period as your qualifying 12-month period.

Since that overlaps two tax years, you’ll prorate the income you can use for the FEIE.

2021 Prorated Foreign Earned Income Exclusion:

2022 Prorated Foreign Earned Income Exclusion:

I think I pass the Physical Presence Test – what next? 

Passing the PPT can be tricky, especially if you moved in the middle of the year and are trying to figure out how to calculate your full days and 12-month period to qualify. 

If you’re new to the process, you can take these proactive steps to ensure that your tax bill is maximally minimized: 

-Track your travel time carefully, saving all records of travel in a secure location (digitally or physically), including flight tickets and travel itineraries. 

-File a US tax extension if you need more time to meet the PPT requirements and file Form 2350.

-Consult with one of our Bright!Tax CPAs for professional guidance. Our professionals have decades of combined experience living abroad and working with US expats to ensure tax compliance and filing confidence. We’d love to help you!

References

1. US Government Estimation of Americans Living Abroad

The post How to Calculate Physical Presence Test to Claim the FEIE appeared first on Bright!Tax Expat Tax Services.

Example: When it comes to filing US tax returns as an expat, you may find the rules and process to be overwhelming. Luckily, there are credits and other tax breaks that US expats can take advantage of to ease their tax burden. These tax breaks often even eliminate any taxes owed. Two of the biggest tax savings tools expats should know about are the Foreign Tax Credit (FTC) and the Foreign Earned Income Exclusion (FEIE). 

If you’re a US expat, you’ll want to consider using both when filing your 2021 tax returns.

As expat tax day (June 15th) approaches, here’s everything you need to know about the FTC and FEIE, so you can decide which one is right for your financial situation. 

How can the FTC and FEIE help lower your tax liability?

First, it’s important to understand the difference between tax credits and deductions. Tax credits allow you to reduce your income tax directly, in other words, lowering any taxes you might owe. And, if the credit is refundable, it can actually increase your tax refund. This is the case even if you haven’t paid US tax during the year. Non-refundable credits, on the other hand, can lower your tax bill, but won’t add on to your refund amount.

Deductions, on the other hand, reduce your taxable income. This lowers the amount the US will calculate your tax on, lessening or even eliminating your tax bill altogether.

As a US expat, both the FTC and FEIE can help reduce the amount of money you’ll owe the IRS in taxes. They can also prevent you from getting taxed twice – once by the country where you’re working or living and again by the US. 

What is the Foreign Tax Credit?

The Foreign Tax Credit reduces your tax bill by one dollar for every dollar (or dollar equivalent using the foreign exchange rate) you’ve already paid in foreign taxes. This saves you from double taxation on the same income.

So, for example, let’s say you are a US expat living abroad in Bali and you make $60,000 per year. If you’ve already paid $10,000 in taxes to Indonesia, then you can claim the Foreign Tax Credit for the amount of $10,000 to directly reduce your US tax bill. As long as the US tax bill related to your income is $10,000 or more, your credit will be the full $10,000. In many cases, this credit will eliminate the need to pay US taxes altogether by wiping out your taxes owed – but you’ll still need to file and claim this credit first.

Beyond using foreign tax paid as a credit, you can choose to instead take the foreign tax paid as an itemized deduction. If you claim it as a deduction, it will reduce your US taxable income, which will in turn lower your tax bill. If you opt to take the FTC as a credit instead, it will directly reduce your foreign tax bill. In most cases, if you’re claiming the FTC, it will be more financially beneficial for you to claim it as a credit.

You can only claim the FTC on foreign-sourced income taxed by provincial, local, or national governments. You can’t claim credits for taxes paid for foreign real estate tax, value-added tax (VAT), sales tax, social security, or property tax.

Who can claim the FTC?

You can only claim the FTC if you are a US citizen or taxpayer who earned and paid taxes on foreign income or other profits. Additional requirements include:

• – The foreign country must have imposed taxes on your income
• – You have already paid the tax or it has accrued (ie it’s due in the future based on income already earned)
• – You did not profit from paying the foreign tax
• – The US has not sanctioned the country to which tax was paid

Who should claim the FTC?

If you’re a US expat, a few situations where it’s advisable to claim this credit are if you…

• – Pay higher taxes in the country where you live than you would in the US: In this case, claiming the FTC typically will end up eliminating any US tax you might otherwise owe.
• – Have passive income streams earned outside of the US: You can apply the FTC to active and passive sources of income, including rental income, pensions, and investments from foreign countries.
• – Have dependents that qualify for the Child Tax Credit: As long as you have a child who is a US citizen and legally your dependent, you can qualify for a refundable CTC.
• – Want to contribute to an IRA: If you claim the FTC as a credit, and not a deduction, it won’t lower your earned income, which in turn allows you to contribute more to an IRA.

A Bright!Tax CPA can help you determine if the FTC makes the most sense for your financial situation.

What is the Foreign Earned Income Exclusion?

The other tax exemption you should consider as a US expat is the Foreign Earned Income Exclusion or FEIE. This tax break is more widely known than the FTC and can also help you reduce your US tax bill by reducing your taxable income. Like the FTC, it will prevent double taxes on your income – but may not make sense for all US taxpayers living overseas.

The FEIE works by lowering the amount of US taxes you’re on the hook for paying, by allowing you to exclude all or some of your foreign earned income from your tax return. Your foreign income must be from earned income including salaries, wages, bonuses, or commissions – you cannot exclude passive income.

For 2021 taxes, you can exclude up to $108,700 in earned foreign income through the FEIE; the 2022 threshold for the FEIE is set at $112,000. This then reduces your taxable income, lowering your US tax bill, and in some cases, may actually eliminate it altogether.

So, for example, if you’re a US expat who earned $80,000 in foreign income last year and made no other money – you could end up with a $0 tax bill. That’s because your income is under the threshold, so you’re able to exclude it all from taxation. 

Who can claim the FEIE?

In order to qualify for the FEIE, the IRS requires that you pass either the Bona Fide residence test or the physical presence test:

• – You can prove that you are a bona fide resident of another country: In this instance, if you’ve established residency in a foreign country for an entire tax year, you can claim this deduction. For example, if you traveled to Cape Town at the end of 2020 and became a resident before the beginning of 2021, you could claim the FEIE on your 2021 taxes. This applies if you’re a US citizen or resident alien.
• – You were outside of the US for 330 days or more: This stipulation requires you to be outside of the US for at least 330 during twelve consecutive months. For example, if you traveled throughout Europe and Asia for most of 2021, and were only in the US for 15 days this year, you would fulfill this requirement.

Who should claim the FEIE?

The FEIE is a great way to save money on your taxes, but how do you know if it’s right for you? Here are some instances where it can make sense to claim the Foreign Earned Income Exclusion:

• – You do not pay foreign income tax: In this instance, claiming the FEIE is the best way to ensure you get the biggest tax break possible.
• – Your foreign taxes are lower than the US tax rate: If you pay less taxes abroad than you would in the US, the FEIE is typically the better option.
• – You’re on an IDR for a US student loan: This exclusion can benefit US expats with student loan debt tremendously. Loan servicers base your US income-driven repayment plans for federal student loans on the amount of income reported on your US taxes. If you claim the FEIE, it could reduce your adjusted gross income to as little as $0, which could eliminate your monthly student loan payments. Even if your AGI is higher than $0, your repayment requirements could still drop tremendously.
• – You’re claiming the stimulus payments from 2020 or 2021: If your income exceeded the threshold for obtaining Economic Impact Payments for COVID, you might still receive your full stimulus payment while claiming the FEIE, as it reduces the income used to evaluate whether you qualify.

If you’re not sure if you qualify for the FEIE, you can use the IRS’s interactive tax assistant tool or chat with a tax professional at Bright!Tax.

Which is best for you, the Foreign Tax Credit and the Foreign Earned Income Exclusion?

While both the FTC and FEIE can help lower your US tax bill, choosing the best tax exemption for your financial situation is important – choosing the wrong one could lead to you paying more taxes than you owe.

In general, at Bright!Tax, we recommend checking to see if you can apply for the Foreign Tax Credit first, for a few reasons. First, you can apply this credit to active and passive income streams, which can help reduce your tax burden comprehensively. Secondly, the stipulations for the FTC are less stringent than the FEIE – you don’t have to limit your US travel unless you’re earning income there. On top of this, you can carry any unused tax credit from the FTC forward and apply it to your next 10 years of tax returns or carry it back to your previous year’s taxes.

Perhaps most importantly, the FTC offers more flexibility for the majority of US expats. Once you claim the FEIE, you’ll need to claim it each year. If you decide to instead claim the FTC, you’ll need to revoke the FEIE. You’re then locked out of claiming it for the next five years.

For example, if you claim the FEIE for your 2020 taxes and decide to discontinue using the FEIE in 2021, you’re then prevented from claiming the FEIE for your next five tax returns.

Of course, everyone’s situation is different and depending on your financial situation, you may only be eligible for one of these two credits. For example, if you don’t pay foreign taxes, you can’t claim the FTC, so you should claim the FEIE in this case. Likewise, if you earn income sourced in the US, even if you pay foreign taxes on it, you cannot claim the FTC.

Here’s a quick comparison of when we recommend using each tax exemption:

The good news is, you don’t have to figure this out on your own. Bright!Tax can help you figure out which foreign tax break will save you the most money.

Can you claim both the Foreign Tax Credit and Foreign Earned Income Exclusion?

Yes, it’s possible to claim both tax exemptions, but not on the same income. It’s actually quite common – especially when people earn more than the FEIE threshold.

For example, if you’re a US expat whose foreign tax rate is lower than the US rate, you might opt to claim the FEIE for the income you earn abroad. You could then claim the FTC for any passive income you earn, such as from rental properties or other investments. This strategy may maximize the amount you’ll save on your US tax bill.

How do you claim the FTC or FEIE?

You can claim both the FTC or FEIE when filling out your tax returns.

The Foreign Tax Credit is filed with IRS Form 116 and the Foreign Earned Income Exclusion with IRS Form 2555. You can submit these forms electronically or by mail with your Form 1040.

 If you need help filing a return, understanding the difference between the FTC and FEIE, or have other tax questions, reach out to an expert CPA at Bright!Tax.

When do I have to file my taxes?

If you reside abroad as of tax day 2022, as a US expat, you receive an automatic two-month extension to file your tax return. While US residents had to submit their 2021 tax returns on April 18th of this year, your tax return is due on June 15. If you still need more time to file, you can request an extension, which will extend your due date to October 15, 2022.

You can give yourself a little extra time to decide which tax exemption is best for you, by filing an extension with IRS Form 4868. You can mail this form directly to the IRS or work with your tax preparer or software service to submit it electronically. 

And, if you realize you need even more time to get your tax documentation in order, you can send a written request to the IRS asking for an additional extension, moving your tax due date to December 15, 2022.

Can I claim the FTC or FEIE if I did not file my taxes last year?

Are you a little behind on your US taxes? Don’t panic. Thanks to the IRS Streamlined Procedure, catching up on past tax returns is simpler and less stressful than in the past. You can file three past-due tax returns via this process if you’re a US expat who has been out of the US for at least 330 days during one of these delinquent tax years. To take advantage of this process, you’ll also need to certify not filing was a result of non-willful conduct (for instance, you didn’t know you owed the US a tax return). The IRS also must not have contacted you about these returns first.

If you qualify for the Streamlined Procedure, you can also claim the Foreign Earned Income Exclusion and Foreign Tax Credit for the tax years submitted. 

Bright!Tax can help you find the best tax breaks

While both the FTC and FEIE are great options for reducing your tax bill as a US expat, they’re just the start of the tax credits and exemptions you can apply to your 2021 tax return. Bright!Tax CPAs are experts in US expat tax and can help you minimize your tax liabilities, so you don’t end up paying more than you should..

Talk to a Bright!Tax CPA today to claim the Foreign Tax Credit or Foreign Earned Income Exclusion and make filing your tax return quick and painless.

The post Claiming the Foreign Tax Credit vs Foreign Earned Income Exclusion: Which one is right for you? appeared first on Bright!Tax Expat Tax Services.

For expats filing taxes, the term refers to a qualifying test under a common IRS tax provision that US citizens and Green Card holders can use to offset their US tax liability. This is good news because according to a CBS News/YouGov survey, over 60% of Americans believe they’re paying more than their fair share on their US tax return.¹ 

This issue is especially relevant for US expats, who are often surprised to learn that they typically must continue filing US tax returns. That said, American citizens and permanent residents can benefit from IRS tax savings while living abroad to avoid double taxation if they pass the Bona Fide Residence Test.

In this article, we answer common questions from our clients about the Bona Fide Residence Test, situate it within the context of the broader FEIE, and more.

What is the Bona Fide Residence Test? 

The IRS’s Bona Fide Residence Test verifies that you’ve established residency in another country. You must pass the Bona Fide Residence Test to qualify for the Foreign Earned Income Exclusion (FEIE) and Foreign Housing Exclusion (FHE). 

According to the IRS,² “you are a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. If you are a calendar year taxpayer, the entire tax year is from January 1st through December 31st.”

Related: The Foreign Earned Income Exclusion in 2024: An Expat Guide

Bona Fide Residence Test vs. Physical Presence Test: What’s the difference? 

It’s essential not to get the Bona Fide Residence Test confused with the Physical Presence Test. While both tests help you qualify for the IRS tax exemption programs and avoid double taxation, they have different requirements.  

The Bona Fide Residence Test relates to the social and economic ties you establish with your new home country. This means you should have already established permanent residency in a country, with no immediate plans to return to the US.

On the other hand, the Physical Presence Test only has to do with the number of days you spend outside the US. To pass the test, you need to spend more than 330 full days overseas within a 365-day period, which does not necessarily have to align with the tax year. The IRS provides a specific resource to learn more about this test.

Related: How to Calculate Physical Presence Test to Claim FEIE

Taxpayers qualifying under the Bona Fide Residence Test – Form 2555

There’s no guarantee of passing the Bona Fide Residence Test, as the IRS reviews each case individually to determine bona fide residency. However, the primary requirements to qualify for the Bona Fide Residence test are as follows:

• Have established residence in a foreign country of your choice. 
• Actively earn foreign income in your new country of residence. Unearned income such as dividends or pensions doesn’t count. 
• Have no immediate plans to return to the US. For example, if you have a student visa, you won’t be able to qualify for bona fide residence. 
• Have proof of a foreign address or permanent home. Documents such as utility bills and rental contracts will help your case. 
• Have resided in your new home country for a full tax year (i.e., the calendar year).

Other things that aren’t necessarily requirements but will help you qualify as a bona fide resident include documents such as proof of paying foreign income tax or an employment contract. If you have family members in your new home country, it will also help to prove that you’ve permanently made your new life abroad. 

Related: Filing Form 2555: A Guide for US Expats

Can I still travel to the US as a bona fide resident? 

As a bona fide resident, you can return to the US for vacation without worrying too much about disqualifying yourself for the test. However, make sure to monitor the length of your stay. It is advisable to avoid spending excessive time in the US during the tax year or engaging in activities that could indicate an intention to return to the US. For example, buying a personal residence may jeopardize your bona fide resident status. 

Bona Fide Residence Test Examples

To help better understand the Bona Fide Residence Test, we’ve included two examples of when an expat might (or might not) qualify as a bona fide resident abroad:

Example 1:

You landed a job at a company based in the UK and moved to London in August 2020. The opportunity was initially planned to be a three-month, temporary position. But, as often happens, you fall in love with expat life and negotiate a permanent position, deciding to purchase a home in the UK in December 2020.  

In April of 2021, you went back to Chicago, Illinois (where you used to live before moving to the UK) for one week to visit friends and family. You returned to London right after that week and remained in the country for the rest of the year. 

In this case, you spent an entire tax year (January 2021 – December 2021) in the UK. As a result, you may qualify for bona fide residence in the eyes of the IRS. 

Related: Taxes in the UK vs. US: The Full Breakdown

Example 2:

Your US-based tech company transferred you to Switzerland in August 2020. You rent a home in the country and enjoy your new life in Switzerland until your company decides to move you back to the US in October 2021. 

While you did spend more than a year in Switzerland, you didn’t spend an entire tax year within a 12-month period in the country. In this scenario, you would not qualify for bona fide residence.

Need help navigating the Bona Fide Residence Test?

The Bona Fide Residence Test can be a difficult topic to navigate for American expats. Bright!Tax is here to help and offer guidance, both with the FEIE and tax planning and preparation more broadly.

Meet Your CPA

References

1. US Taxes Opinion Poll
2. FEIE – Bona Fide Residence Test – IRS

The post What Is a Bona Fide Resident for the FEIE? appeared first on Bright!Tax Expat Tax Services.

Additionally, an aspect of moving overseas that prohibits many Americans from taking the leap is the potentially high costs of such a move. On top of that, since the US has a citizenship-based taxation system, you’ll still have to file your US taxes even in your new home country. 

Thankfully, living overseas doesn’t have to be as expensive as you think. One of the many tax provisions the IRS provides to expats is a Foreign Housing Exclusion provision to help international taxpayers save money on their US tax returns. 

In this article, we’ll dive into what the Foreign Housing Exclusion is all about and answer the most common questions we get from our clients about this tax deduction. 

What is the Foreign Housing Exclusion?

The Foreign Housing Exclusion (FHE)¹ allows American expats living abroad to exclude income they earn abroad from their taxable income on their US returns. The exclusion is based on a significant portion of their foreign housing expenses.

The FHE is a good option for US expats living abroad who make more than the Foreign Earned Income Exclusion limit ($112,000 for the 2022 tax calendar year). Along with Foreign Earned Income Exclusion (FEIE), the FHE helps expats avoid double taxation and reduce what they owe to the IRS. 

You file your FHE claim on the same tax form as the FEIE, Form 2555.²

What are the qualifications for Foreign Housing Exclusion? 

The FHE isn’t an option open to all US expats. To qualify for the FHE, you must go through the same eligibility requirements as the FEIE, which include:

Bona Fide Residence Test

The Bona Fide Residence Test³ involves proving the social and economic ties with your new host country. The test is a good option for US expats who have already established residency in another country with no plans of leaving. 

To qualify for the Bona Fide Residence Test, you need to be a resident of a country for an entire calendar year (with no interruptions). Documents to help you qualify as a Bona Fide resident include a rental contract or a permanent residency visa in a foreign country. 

Read more: The FEIE Bona Fide Residence Test For Expats

Physical Presence Test

The Physical Presence Test⁴ involves being physically present in a foreign country for at least 330 days during any 12-month consecutive period. Unlike Bona Fide Residence, you don’t need residency in another country to pass the Physical Presence Test. Whether or not you plan to return to the US also doesn’t matter. 

Read more: The FEIE Physical Presence Test For US Expats

Can self-employed expats benefit from the Foreign Housing Exclusion? 

Self-employed expats can claim the FHE. However, when self-employed expats claim this provision, it’s considered a deduction, as opposed to an exclusion. The reason for this is that it deducts their housing expenses from their gross income to reduce tax liability. 

The deduction, however, will not reduce self-employment tax liability. That includes the social security tax of 12.4% and Medicare tax of 2.9%. 

Expenses that qualify for the Foreign Housing Exclusion (FHE)

A wide range of housing expenses are eligible for exclusion or deduction. Qualified housing expenses that the Foreign Housing Exclusion or Deduction can cover include:

• Rent, or the fair rental value of housing provided by your employer
• Utilities (except for telephone charges and TV services)
• Necessary repairs
• Property insurance (including contents)
• Fees for securing a leasehold
• Occupancy taxes
• Residential parking
• Rental of furniture and accessories

The FHE cannot cover any foreign housing expenses considered fancy or lavish. According to the IRS:

“Housing expenses do not include expenses that are lavish or extravagant under the circumstances, the cost of buying property, purchased furniture or accessories, and improvements and other expenses that increase the value or appreciably prolong the life of your property.”⁵

Other expenses that don’t qualify for the FHE include:

• Domestic labor (such as hiring someone to cook or clean)
• Mortgage payments
• Purchased furniture 
• Home improvement projects

What is the maximum exclusion amount under the Foreign Housing Exclusion? 

The maximum expense that you can exclude will depend on the total amount of your housing expenses and the base housing that the IRS permits you based on your location. Your eligible expenses also can’t exceed your foreign-earned income. 

The IRS offers US expats a base housing amount of 30% of FEIE.⁶ However, because different cities have different living costs, the maximum amount will depend significantly on where you’re currently living. 

How to calculate the Foreign Housing Exclusion

As mentioned earlier, you’ll calculate your FHE with Form 2555. Here’s how you can calculate the excludable income under FHE:

1. Calculate your total housing expenses in your host foreign country across an entire tax year. 
2. Calculate your FEIE that’s going to be in your US tax return. 
3. Deduct the base amount from your qualifying housing expense to determine your “housing amount”. 
4. Make sure that your housing expenses don’t exceed the maximum housing expenses of where you live. You can find the IRS’ list of cities and their housing expenses limits on page 6 of Form 2555 instructions.
5. Add the housing amount to the Foreign Earned Income Exclusion limit to get the whole figure you can exclude from income tax. 

You will include the amount of your FHE as part of your FEIE on your US tax return.

If you’re a self-employed US expat, the process will be different. In your case, you’ll file a claim for Foreign Housing Deduction in Part IX of Form 2555. 

One important thing to mention is that if an expat couple lives together, then only one partner can file a claim for their FHE. Married expat couples also have to calculate their housing expenses together. 

Some expat spouses may not live in the same house in some situations. In this case, each partner has to file their FHE or deduction claim separately based on their tax return. Each partner’s home must not be within a short commuting distance of each other to qualify for this option.  

Read the full guide: Filing Form 2555: A Guide for US Expats

Claim your Foreign Housing Exclusion with the right team of experts

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References

1. Foreign Housing Exclusion – IRS
2. Form 2555 – IRS
3. Bona Fide Residence Test – IRS
4. Physical Presence Test – IRS
5. Foreign Housing Exclusion or Deduction – IRS
6. Limit on Excludable Amount – IRS

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Americans living abroad are still liable to file and pay US taxes, and the Foreign Earned Income Exclusion provides a way for Americans to exclude income earned while living abroad from US tax liability, and so avoid double taxation.

How does the Foreign Earned Income Exclusion work?

The Foreign Earned Income Exclusion allows Americans living abroad to exclude around $110,000 (the exact amount rises a little every year) of their income from US tax liability.

It is the primary way for Americans living and working abroad to avoid paying taxes to both the government of the country where they live and to the IRS on the same income. The US taxes all of its citizens on their worldwide income, wherever in the world they live.

The Foreign Earned Income Exclusion must be actively claimed however, by filing form 2555 along with form 1040. It isn’t applied automatically.

How does the Bona Fide Residence Test Work?

The Bona Fide Residence Test allows expats to prove that they live abroad, and so claim the Foreign Earned Income Exclusion.

The onus is on the taxpayer to prove that they are a permanent resident in a foreign country for the entire tax year in question.

Unfortunately there is no clearly defined way of doing this, and the IRS judges each tax payer’s case on its own merits.

If are a permanent resident in the country where you live, and can prove it by proof of a permanent home, such as a rental contract and utility bills, this will go a long way to proving Bona Fide residence there. Proof of paying foreign taxes in the country where you live is another way, as is showing proof of permanent employment or legal residence there, for example by providing an employment contract or a residence visa.

If you are living abroad but are not a permanent resident in a foreign country (perhaps you are roaming from country to country outside the US as a Digital Nomad), you can still claim the Foreign Earned Income Exclusion if you can prove that you spent more than 330 days in the tax year outside the US. This is known as the Physical Presence Test. If you spent 330 days outside the US in a 365 day period that overlaps with tax year, you can also claim the Foreign Earned Income Exclusion for the days in this period within the tax year.

Catching up

For US expats who haven’t been filing a US tax return because they weren’t aware that they had to, there is an IRS amnesty program called the Streamlined Procedure that lets them catch up with their filing without facing any IRS fines or penalties.

The post The FEIE Bona Fide Residence Test For Expats appeared first on Bright!Tax Expat Tax Services.

One of the primary provisions that expats can use to exclude their income earned abroad from US tax liability is the Foreign Earned Income Exclusion.

This lets Americans living abroad exclude the first around $110,000 of their foreign income, including self employment income, from US tax. The exact amount rises a little each year. The Exclusion should be claimed on form 2555, which should be attached to form 1040.

The Foreign Earned income Exclusion takes many US expats out of US tax liability altogether. It is only available to Americans living abroad though, and there are strict rules governing exactly who does and who doesn’t qualify.

Tests to qualify for the FEIE

To qualify for the FEIE, expats must pass one of two IRS tests: the Bona Fide Residence Test, or the Physical Presence Test. In this Article we’re going to focus on the Physical Presence Test.

The Physical Presence Test requires you to prove that you were outside the States and in a foreign country for 330 days in a twelve month period.

Each of the 330 days must be a full 24 hour day. This means that if you leave the States at 3am one morning, and arrive in Canada for example just an hour later, this day won’t count towards the 330 days, despite you having spent almost the entire day abroad. The only exception to this rule is if you are only in the US in transit, on your way from one foreign country to another.

This is also true for time spent over international waters, so for example if you leave the US on a flight at 11pm, and fly over international waters for several hours until you land in a foreign country at 7am the following morning, despite not having been in the US at all on the day you arrive, because the first few hours were spent over international waters it doesn’t count as a full day spend in another country. Neither do US overseas territories or possessions count as foreign countries

Moved abroad mid year?

You must be able to show that you would have met the minimum time requirements abroad if not for the adverse conditions though.

Proving you met the Physical Presence Test

Note also that if you are claiming the Foreign Earned Income Exclusion using the Physical Presence Test, it’s worth making sure that you can prove your travel movements, and keeping the proof safe, in case of a future audit. You have to claim the FEIE and show you met the Physical Presence Test on Form 2555.

Who should use the Physical Presence Test?

Americans who spend most of the year abroad but can’t demonstrate permanent residence in one foreign country should use the Physical Presence Test, such as international digital nomads for example, who move from country to country.

The Foreign Earned Income Exclusion removes many US expats from US tax liability, so it’s worth ensuring that you meet the requirements to qualify, planning your trips to the States accordingly so as not to spend more than 35 days there if necessary. It doesn’t carry over to future years automatically, so you need to re-claim it every year. If you earn over around $110,000 it can also be claimed in conjunction with the Foreign Housing Exclusion, and the Foreign Tax Credit, both of which, if applicable to your situation, will reduce or hopefully eliminate any remaining US tax liability.

What if you didn’t know you have to file US taxes from abroad?

If you didn’t know you had to file US taxes from abroad, you can catch up without facing penalties using the Streamlined Procedure amnesty program, including claiming the Foreign Earned Income Exclusion for your missed years. Seek advice if you have any questions.

The post The FEIE Physical Presence Test For US Expats appeared first on Bright!Tax Expat Tax Services.

By claiming the Foreign Earned Income Exclusion, Americans with foreign-sourced income can exclude a substantial amount of their earnings from US taxation. In this article, we’ll go over the FEIE in-depth, addressing questions like “How does the Foreign Earned Income Exclusion work?” “What does the Foreign Earned Income Exclusion mean?” “Do I qualify for the Foreign Earned Income Exclusion?” and more.

Note: The recommendations in this article apply to filing the Foreign Earned Income Exclusion for the 2023 tax year (in other words, the taxes you file in 2024!).

What is the Foreign Earned Income Exclusion?

Let’s start with the basics: What is the FEIE, exactly? As we mentioned above, the Foreign Earned Income Exclusion, sometimes searched for as the “foreign income exclusion,” is an IRS benefit that American expats can claim when they file their United States tax return.

Thankfully, the FEIE allows those who qualify for it to drastically reduce — and in some cases, even eliminate — their US tax bill. That’s because the FEIE allows expats to exempt a certain amount of their income from taxation. The FEIE threshold for the 2023 tax year is $120,000. However, as you can see below, the precise amount increases each year to account for inflation.

Foreign Earned Income Exclusion Amounts

Related: 2024 Tax Changes: IRS Updates US Taxpayers Overseas Should Know

Let’s consider how the Foreign Earned Income Exclusion works with different types of income.

What is considered earned income?

There is a crucial callout here: Per the provision’s name, expats should note that the FEIE can only be used to exclude earned income. Earned income comes from work or personal services rendered, including:

• Salary 
• Wages
• Commissions
• Bonuses
• Tips

Other earned income also extends to:

• The monetary value of certain taxable benefits, including:
  • Sick leave
  • Vacation
  • Severance
  • Benefits earned in a union strike
  • Some disability benefits, if provided to you before the minimum retirement age
  • Non-taxable combat pay, if you elect to treat it as earned income
• Professional fees for services rendered abroad
• Self-employment income (more on this in a bit)

Unearned or passive income

However, the FEIE cannot be applied to unearned income, also known as passive income.

Passive income refers to any income derived from a source other than work. A few examples of income that cannot be claimed on the FEIE include:

• Social Security benefits
• Pension income
• Rental income
• Dividends
• Interest from investments
• Gambling winnings
• Capital gains
• Annuities
• Child support
• Alimony payments
• Trust fund payments

Related: Reporting Foreign Rental Income on Property Abroad

Other types of income that do not qualify for the FEIE

A few more types of income that are not FEIE-eligible include payments received as a military or civilian employee of the US government, including those for services conducted in international waters.

Additionally: 

• Payments received after the end of the tax year or the 365-day period being claimed using the Physical Presence Test do not qualify (even if the service was performed during that time)
• Meals and lodging that are excluded from income for the convenience of the employer

Foreign Earned Income Exclusion eligibility

To claim the FEIE, expats must demonstrate that their tax home is in a foreign country by meeting one of two IRS tests.

The Physical Presence Test

The Physical Presence Test requires expats to prove that they were physically present in a foreign country for at least 330 full days in  a consecutive 365 day period, which does not need to coincide with the tax year.

The Bona Fide Residence Test

The Bona Fide Residence Test requires expats to prove permanent residence in a foreign country through official documents like a permanent residency visa, foreign income tax records, or proof of housing rental/ownership and utility bills in the expat’s name.

Note: The IRS states that this bona fide residency must occur in foreign countries “for an uninterrupted period that includes an entire tax year.”

Which FEIE test to choose

So, which test should you select when planning your time abroad and filing your US tax return?

The answer depends on your situation.

The Physical Presence Test is useful for location-independent US taxpayers who are moving between countries (such as digital nomads). It is also helpful when you cannot demonstrate permanent residence in any one foreign country. That said, this test requires that you limit and carefully count the days you spend in the US in order to meet its requirements.

The Bona Fide Residence Test, on the other hand, is useful for expats who can demonstrate that they officially reside in another country and don’t want strict limits placed on the number of days they spend in the US each year.

The FEIE and the Foreign Housing Exclusion

There’s more — those who qualify for the FEIE and earn above the FEIE threshold (again, $120,000 in tax year 2023) can further exclude amounts related to certain qualified housing expenses by using the Foreign Housing Exclusion (FHE). This includes expenses like rent, utilities, occupancy taxes, and more.

Note: If you are a self-employed expat, you will claim the Foreign Housing Deduction instead of the Foreign Housing Exclusion.

Related: Foreign Housing Exclusion: Calculate and Offset Expenses

Who should claim the Foreign Earned Income Exclusion in 2023?

We’ve talked about who can claim the FEIE — but who should claim the FEIE? 

The FEIE is especially beneficial for expats who:

• Earn less than the annual FEIE threshold
• Only have earned income (not unearned/passive income)
• Don’t pay foreign income tax 
• Pay foreign income tax at a lower tax rate than the US
• Can prove that they live abroad according to the IRS criteria

Again, this makes the FEIE a viable option for digital nomads, who can often avoid paying foreign income taxes entirely if they travel from country to country in short stints. However, to qualify, they must spend at least 330 days a year abroad and not maintain a US tax home.

The FEIE might not suit expats who:

• Have large amounts of unearned income
• Earn over the annual FEIE threshold
• Pay foreign income taxes at a higher rate than the US
• Are unable to fulfill IRS criteria to prove that they live abroad

The FEIE for self-employed expats 

As mentioned earlier, the FEIE can be applied to foreign-earned self-employment income. There are a couple of important caveats worth noting, however.

For one, the FEIE can only be applied to your gross income (aka the total amount you earn), not your net income (aka the amount you earn after expenses and deductions). 

The FEIE only excludes your foreign-earned gross income from federal income taxes. This means that self-employed expats may still be liable for US self-employment taxes.

Unless they pay social security taxes in a country with a totalization agreement with the US, self-employed expats must pay a 15.3% self-employment tax: 12.4% of which goes toward Social Security, and 2.9% of which goes toward Medicare.

Related: How to File Taxes for Self-Employed Expats: The Essentials

How to claim the FEIE

To receive the tax benefit of the Foreign Earned Income Exclusion, expats must file IRS Form 2555 with their federal tax return.

What is Form 2555? 

Form 2555 is the IRS paperwork required to claim the FEIE. The form has nine sections:

• Section I is where you’ll input personal details, your employer’s details (if applicable), and where your tax home is
• Section II is for expats who meet the Bona Fide Residence Test
• Section III is for expats who meet the Physical Presence Test
• Section IV is for your earned income and expense details, which should correspond with the figures you enter in Form 1040
• Sections V and VI relate to the Foreign Housing Exclusion/Deduction
• Sections VII-IX are where you’ll enter the final figures used to calculate the total amount you’ll be excluding

Can I claim the FEIE late?

The IRS rules allow some leeway for expats in this situation. They stipulate that the Foreign Earned Income Exclusion can be claimed as part of a: 

• timely filed return, including any extensions
• return that is amending a timely filed return
• late-filed return filed within one year of the original due date of the return (not counting any extensions)

After a year though, expats may still file a late return and claim the Foreign Earned Income Exclusion so long as they do so before the IRS discovers the absence of the return and contacts them.

A cautionary legal case: The Redfield decision

Expats waiting until the IRS contacts them before filing late returns should not expect leniency from the IRS. This precedent was set by a 2017 decision involving a US Marine veteran, Damon Redfield. 

Following his return to civilian status in 2010, he worked as a civilian contractor in Afghanistan briefly before returning to the US. He didn’t file a tax return relating to time spent as a civilian abroad until the IRS contacted him in 2014, at which point he filed a late return and claimed the Foreign Earned Income Exclusion.

The IRS disallowed his late claim, as they had already contacted him, and a court confirmed their decision, leaving Redfield liable to pay not just tax on the income he earned in 2010, but interest and penalties too. 

This example highlights the importance of making timely filings and elections, particularly, taking action to rectify delinquent situations before the IRS contacts you.

The Foreign Earned Income Exclusion vs. the Foreign Tax Credit

As a resident of a foreign country, another major tax provision that can help expats avoid double taxation is the Foreign Tax Credit (FTC). The FTC allows expats to claim a dollar-for-dollar tax credit for foreign income taxes accrued or paid. It cannot be used to offset self-employment taxes, however.

The FTC is useful when an expat lives and pays taxes in one of the many countries with a higher income tax than the US. In these cases, the FTC can not only eliminate their US tax bill but also grant them excess tax credits that can be applied to future US tax bills for up to ten years (or back one year, by filing an amended return).

Furthermore, there’s no IRS limit set on the amount of tax credits that can be claimed, and the FTC can be applied to unearned income as well (so long as foreign income tax has been paid on it).

Can I claim the Foreign Earned Income Exclusion and the Foreign Tax Credit?

Expats can claim both the Foreign Earned Income Exclusion and the Foreign Tax Credit, but they cannot apply them both to the same income. 

Bright!Tax ensures a globally-efficient US tax strategy.

As expat tax professionals, Bright!Tax understands the nuances inherent in understanding IRS tax provisions and applying them strategically. That’s why we specialize in serving the expat community: to help US expats like you with tax obligations.

Meet Your CPA

References

1. Disability and the Earned Income Tax Credit
2. About Form 2555: Foreign Earned Income
3. Former Marine not entitled to exclude foreign earned income

The post The Foreign Earned Income Exclusion (FEIE): A 120K Expat Tax Break  appeared first on Bright!Tax Expat Tax Services.

The Foreign Housing Exclusion is granted in conjunction with the Foreign Earned Income Exclusion, but neither are granted automatically: you have to apply for them and file form 2555 with your annual return.

The Foreign Housing Exclusion is typically a good option for people who live in rented property while living and working abroad and who earn more than the Foreign Earned Income Exclusion limit ($108,700 in 2021).

All US citizens and green card holders are required to file a US federal tax return reporting their worldwide income, wherever in the world they live. The Foreign Earned Income Exclusion and the Foreign Housing Exclusion offer ways for r US expats to avoid double taxation on their earned income.

How to claim the Foreign Housing Exclusion

To claim the Foreign Housing Exclusion, you have to first claim the Foreign Earned Income Exclusion. To claim the Foreign Earned Income Exclusion, you have to file IRS Form 2555 when you file your US tax return. Form 2555 requires that you demonstrate that you live abroad using either the Physical Presence Test, showing that you spent more than 330 days outside the US in the tax year, or the Bona Fide Residence Test, proving that you are legally resident in another country.

The Foreign Earned Income Exclusion lets qualifying expats exclude up to around $110,000 of their earned income from US income tax. The exact figure rises a little each year for inflation. Note that passive income such as rental income, retirement income, or income from investments can’t be excluded using the Foreign Earned Income Exclusion. Expats who earn more than the annual threshold and who rent their home abroad can also claim the Foreign Housing Exclusion.

Furthermore, the claimable expenses in total cannot exceed your foreign earned income, but must exceed what the IRS calls the ‘base amount’ for the place you live. For most places, the base amount is 16% of the amount of Foreign Earned Income Exclusion claimed (so a maximum of 16% of $108,700 in 2021, or $17,392).

How to calculate how much income can be excluded using the Foreign Housing Exclusion

The IRS uses a complex formula to calculate how much earned income above the Foreign Earned Income Exclusion threshold can be excluded from income tax using the Foreign Housing Exclusion on Form 2555. The calculation is as follows:

First, calculate the total of your qualifying housing expenses, and check that this figure exceeds the ‘base’ amount.

Now deduct the base amount from your qualifying housing expenses. The figure that you are left with is called the ‘housing amount’.

Now check that the housing amount doesn’t exceed the maximum housing expenses limit for where you live. This is normaly 30% of the Foreign Earned Income Exclusion limit, however the IRS recognizes that some places have higher housing costs, so they publish a list of limits for these places. You can see the full list on the Form 2555 guidance notes, on page six.

Now add the housing amount on to the Foreign Earned Income Exclusion limit to get the full figure that you can exclude from income tax.

Can self-employed expats claim the Foreign Housing Exclusion?

Expats who pay foreign income taxes at a higher rate than US income tax rates most often benefit more from claiming the Foreign Tax Credit than the Foreign Earned Income Exclusion and the Foreign Housing Credit. This is because the Foreign Tax Credit, which is claimed on Form 1116, provides the same value of US tax credits as the value of foreign income taxes paid, so eliminating US tax liability completely. So generally speaking the Foreign Housing Exclusion is useful for expats who don’t pay more foreign income tax than the US income tax they’d owe, who earn over the Foreign Earned Income Exclusion limit, and who rent their home abroad.

Seek advice

Filing US taxes from abroad is complex, and the most beneficial way to file differs depending on each individuals circumstances – their income types and levels, and where they live, for example. If you have any questions about your situation, always seek advice from an expat tax specialist.

If you’re behind with your US tax filing from abroad because you weren’t aware of the requirement to file, you may be able to catch up without facing penalties under the Streamlined Procedure program.

The post The Foreign Housing Exclusion: A Brief Guide for US Expats appeared first on Bright!Tax Expat Tax Services.

Many expats struggle to understand this requirement, especially seeing as most other countries only tax residents and income accrued in the country.

The US tax system is different however, and while the requirement for US citizens to file US taxes from abroad has existed since the Civil War, it’s the more recent US global economic dominance that has allowed the IRS to enforce US tax filing rules for expats, so that being abroad means being ‘under the radar’. US tax treaties don’t prevent expats from having to file, either.

The IRS has provisions that expats can claim when they file to reduce their US tax bill though, often to zero.

What is the Foreign Earned Income Exclusion?

The Foreign Tax Credit is the primary provision that allows expats to avoid double taxation. By filing Form 1116, expats can claim US tax credits worth the same value is US dollars as foreign taxes they have paid.

The exact threshold rises with inflation each year. For 2020, it’s $107,600 of earned income, for 2021, it’s $108,700.

Who is it for?

Expats often wonder whether they should claim the Foreign Earned Income Exclusion or the Foreign Tax Credit.

The answer depends on several factors.

The Foreign Earned Income Exclusion best suits Americans whose only income is earned (as opposed to unearned, passive income such as from investments, social security, retirement income, dividends, or rental income), and whose total income is below the annual exclusion limit.

A further consideration that often makes the Foreign Earned Income Exclusion a good option is if an American abroad doesn’t pay at least the same amount of foreign income tax as they would owe the US. If they do, it normally makes more sense to claim the Foreign Tax Credit.

Whether expats have dependent children with US social security numbers can be another determining factor, as it’s difficult to claim both the refund for the Child Tax Credit and the Foreign Earned Income Exclusion.

Many international digital nomads benefit from claiming the Foreign Earned Income Exclusion, if they’re traveling from country to country.

If you’re not sure which is the best way to reduce your US tax bill when filing from abroad, it’s best to consult a US expat tax specialist.

You can either provide confirmation by having permanent residency in another country (this is called the Bona Fide Residence Test), or by proving that you spent at least 330 days outside the US over 365 days (normally but not necessarily the tax year; this is called the Physical Presence Test).

Can you claim the Foreign Earned Income Exclusion in retrospect?

Americans living and working abroad who have missed one or more US tax filings can normally catch up and claim the Foreign Earned Income Exclusion in retrospect as long as the IRS hasn’t contacted them about their missed filing yet.

Expats who have missed more than two filings may qualify to catch up without facing penalties under the Streamlined Procedure amnesty program.

The post How to Claim the Foreign Earned Income Exclusion – Instructions for Expats appeared first on Bright!Tax Expat Tax Services.

In 2021, for many Americans expats around the world filing their 2020 US tax returns, claiming the Foreign Earned Income Exclusion is the best way to avoid paying US tax.

To claim the Foreign Earned Income Exclusion, expats must first meet the qualification rules, and then file a timely federal US tax return, including IRS Form 2555.

Expats receive an automatic two-month filing extension, until June 15th, and can request further time too if needed, until October 15th, by filing Form 4868.

Qualifying for the Foreign Earned Income Exclusion in 2021

To claim the Foreign Earned Income Exclusion in 2021, Americans have to prove that they lived abroad in 2020 in one of two IRS tests.

The Physical Presence Test rules are a bit different relating to the 2020 tax year due to the Coronavirus Pandemic – more about this later.

What types of income can expats exclude in 2021?

Expats can only use the Foreign Earned Income Exclusion to exclude earned income. This covers all salaries, wages, self-employment income, and any other income received for services provided, such as bonuses or tips.

Unearned income such as rental income, interest, gambling winnings, benefits, pension distributions, and income from investments can’t be excluded on the other hand.

How much income can expats exclude in 2021?

There is a limit to the amount of earned income that expats can exclude when they claim the Foreign Earned Income Exclusion. This limit is adjusted each year to take into account inflation. For the 2019 tax year, it was $105,900, while for the 2020 tax year (for filing in 2021) the limit is $107,600.

For the 2021 tax year (for filing in 2022), it will rise to $108,700.

How does the Coronavirus Pandemic affect claiming the Foreign Earned Income Exclusion in 2021?  

The Coronavirus pandemic can affect claiming the Foreign Earned Income Exclusion in 2021 in two ways.

First, the IRS has announced that anyone who expected to be able to claim the Foreign Earned Income Exclusion through residing abroad, and indeed was residing abroad beforehand, but was prevented from being abroad due to the Coronavirus pandemic, can still claim it.

When filing from abroad, expats almost always benefit from seeking specialist advice. The Foreign Earned Income Exclusion isn’t necessarily the best way to reduce expats’ US tax bills – for many expats, claiming the Foreign Tax Credit by filing Form 1116 may be preferable. Overall, the best way to file can only be determined based on each individual’s personal financial circumstances.

Americans living abroad who haven’t been filing US taxes because they weren’t aware of the requirement can catch up without facing penalties (and still claim the Foreign Earned Income Exclusion) under an amnesty program called the Streamlined Procedure.

The post The US Foreign Earned Income Exclusion – Filing in 2021 (for the 2020 tax year) appeared first on Bright!Tax Expat Tax Services.