Foreign Earned Income Exclusion
Summary: The Foreign Earned Income Exclusion is an important law for U.S. expats to understand in order to avoid excess taxation.
The Foreign Earned Income Exclusion (FEIE) is a U.S. tax law provision that allows U.S. taxpayers who live and work abroad to exclude a certain amount of their foreign earned income from their U.S. federal income tax. The purpose of this rule is to alleviate the potential for double taxation (being taxed by both the foreign country where income is earned and the U.S.).
The amount of income that can be excluded under the FEIE is adjusted annually for inflation - $107,600 for 2020, $108,700 for 2021, $112,000 for 2022, and $120,000 for 2023)
To qualify for the FEIE, the taxpayer must meet one of two tests:
The Bona Fide Residence Test: The taxpayer is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year.
The Physical Presence Test: The taxpayer is a U.S. citizen or a U.S. resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.
It's important to note that the FEIE applies only to foreign earned income, which includes wages, salaries, professional fees, and other amounts received as compensation for personal services rendered by an individual. It does not apply to other types of income, such as passive income from investments.
Finally, to claim the FEIE, a taxpayer must file IRS Form 2555 or 2555-EZ with their annual U.S. federal income tax return. The rules surrounding the FEIE can be complex, and taxpayers with foreign earned income should consider seeking the advice of a tax professional.
For up-to-date and comprehensive information, you should always refer to the IRS website or consult a tax professional as the tax laws may have been updated or changed after my last training cut-off in September 2021.
It is strongly encourage that expats use an expat tax professional.
Sources:
Foreign Earned Income Exclusion on the IRS Website.
Foreign Earned Income Exclusion - Tax Home in Foreign Country
About the Author
Joshua Wood, LPC joined Expat Exchange in 2000 and serves as one of its Co-Presidents. He is also one of the Founders of Digital Nomad Exchange. Prior to Expat Exchange, Joshua worked for NBC Cable (MSNBC and CNBC
Primetime). Joshua has a BA from Syracuse and a Master's in Clinical and Counseling Psychology from Fairleigh Dickinson University. Mr. Wood is also a licensed counselor and psychotherapist.
Some of Joshua's articles include Pros and Cons of Living in Portugal, 10 Best Places to Live in Ireland and Pros and Cons of Living in Uruguay. Connect with Joshua on LinkedIn.
First Published: Jul 20, 2023