How Foreign Earned Income Exclusion Benefits US Expats

Foreign Earned Income Exclusion

US citizens living abroad do have certain obligations towards US Taxes. The government has some rules and regulations relating to the taxes applicable to their citizens living in a foreign nation.

US citizens living abroad are eligible to claim the foreign earned income exclusion if they fulfill particular prerequisites of the IRS. It saves thousands of dollars and does prevent double taxation. The employee of the U.S. government residing abroad are not eligible to claim the FEIE.

This article Foreign Earned Income Exclusion for US Expats offers a thorough guide on FEIE and clears some most frequently asked questions around foreign income inclusion.

What is the Foreign Earned Income Exclusion?

IRS calculate the taxes for US citizens on their worldwide income. As per IRS, ‘Foreign-earned income means wages, salaries, professional fees, or other amounts paid to you for personal services rendered by you.’

As a tax advice for US expats, the foreign income exclusion can be used to either reduce or completely eliminate their taxable income in the US.

In order to qualify for foreign earned income exclusion, the US expats need to fulfill specific requirements listed by IRS.

Who qualifies for Foreign Earned Income Exclusion?

To be eligible for the FEIE, the taxpayer’s residence must be in a foreign country and they must have foreign earned income.

As mentioned by IRS, below are categories of citizens eligible for FEIE.

  • A citizen of the U.S. who is a bona fide resident of a foreign nation for a certain uninterrupted duration in an entire tax year.
  • A U.S. resident alien who is a citizen of another country with which the US has an income tax treaty in effect.
  • A U.S. citizen or a U.S. resident alien who is physically present in a foreign country or countries for at least 330 days during any period of 12 successive months.

The eligible persons have to either pass the Bona Fide Residency Test or the Physical Presence Test.

How as a US Expat You reap the Benefits of Foreign Earned Income Exclusion?

A maximum of $112,000 is excluded for 2022

If a US expat is eligible for FEIE, then the amount which is to be excluded is calculated by IRS annually for inflation. Similarly, $108,700 for 2021, and $107,600 for 2020 were adjusted for the said year.

Up to $224,000 for 2022 if you filed jointly as a couple

If FEIE is being filled jointly as a couple, and the spouse also fulfills the FEIE requirements, you can exclude approx double the amount.

Foreign Housing Exclusion

Additionally, a US expat can also claim foreign housing exclusion. Under the housing expenses comes reasonable expenses such as housing rent, utilities, insurance, etc paid or incurred during a financial year.

One can not include any lavish or extravagant expenses, the cost of buying property, purchased furniture or accessories, etc.

The foreign housing exclusion can not exceed a certain limit, and it varies for different locations. In general, it is 30% of the maximum foreign earned income exclusion.

How to claim the Foreign Earned Income Exclusion?

To claim FEIE, US expats need to fill out Form 2555 (or Form 2555-EZ in case you are not claiming the housing deduction) and file it with form 1040. One can also opt for a US expat tax consultation to know the details and complete the process smoothly.

US citizens living abroad do need to have sound knowledge on how to manage taxes and avoid double taxation. With the proper information, resources, and US expat tax consultation, filling for the Foreign Earned Income Exclusion can become an easy-going process.

Filing taxes while living and working abroad can be overwhelming and stressful. As an expat, your tax situation is very different and requires specialized American expatriate tax consultants. Get started with Smart Accountants Expat Tax Services today.

File your Foreign Earned Income with Smart Accounts.