It’s a fact that as an American abroad, you need to file US taxes if you reach the tax filing threshold. However, doing so allows you to take advantage of expat tax benefits. One of them is called the Foreign Earned Income Exclusion. From this, it’s important to understand what impact this benefit has on your finances for 2021.
What is the Foreign Earned Income Exclusion
The FEIE – or Foreign Earned Income Exclusion – is essentially Form 2555 on a US tax return. It allows any taxpaying qualified US expat the right to exclude a certain amount of foreign earned income on their tax return. Foreign earned income can be your salary, wages, or any other amounts paid to you for personal services rendered by you abroad.
Foreign earned income that does not qualify for the FEIE can be: getting paid as an employee of the US government abroad or getting paid for work on international waters. It also does not include the majority of employer contributions into a foreign pension.
Essentially, the Foreign Earned Income Exclusion is a money-saving deduction that helps prevent millions of expats worldwide from double-taxation. This means that the FEIE can eliminate your tax liability as an American abroad.
To claim the Foreign Earned Income Exclusion, Americans abroad must meet the qualifications (see below). And they must claim this benefit on their 2020 tax return.
US tax returns for Americans abroad will need to be submitted by June 15, the automatic two-month extension deadline for expats. However, tax extensions are possible, which you can read about here.
Qualifying for the 2021 Foreign Earned Income Exclusion
To see whether you qualify for the 2021 FEIE as an American expat, you need to pass one of the IRS criteria tests:
Bona Fide Residence Test: You were a registered resident and subject to local income taxes in your foreign host country for at least a full calendar year.
Physical Presence Test: You have lived outside of the United States for 330 full days in a consecutive 12 month period that begins or ends in the tax year. This also applies if you moved abroad within a 365-day period.
Even if you have been in the US for more than 36 days in the tax year, there is a possibility you could claim the Foreign Earned Income Exclusion. It depends on your unique, individual tax profile and situation. You can see what is available to you once you sign up through our app. However, there is a new exception to the Physical Presence Test rules because of the coronavirus pandemic. Please see below for more info.
If you answered YES to at least one of these tests, you are qualified for the 2021 Foreign Earned Income Exclusion tax benefit.
FEIE Income Exclusion Rates
According to the IRS, Americans abroad can exclude up to $107,600 of foreign sourced income for the 2020 tax year. This income is solely money you made outside the US.
This is what the IRS says about foreign sourced/earned income:
‘’Foreign-earned income means wages, salaries, professional fees, or other amounts paid to you for personal services rendered by you. It does not include amounts received for personal services provided to a corporation representing a distribution of earnings and profits rather than reasonable compensation.’’
Due to inflation, the IRS raises the FEIE rate every year. This gives expats a chance to save big money every time.
For the 2021 tax year, the FEIE rate will be $108,700.
How to Calculate 2021 Foreign Earned Income
To calculate your foreign earned income for the Foreign Earned Income Exclusion as a US citizen abroad, you can do the following:
- Subtract the minimum FEIE exclusion rate of 2020 – $107,600 – from your yearly foreign earned salary of 2020. If you have any remaining amount of money, it becomes taxable for the IRS.
Remember, the taxable amount is taxable according to the stacking rule. That means the taxable amount will be taxed at the rate applied to what you originally earned.
COVID-19 and the Foreign Earned Income Exclusion
The IRS made a special announcement about the coronavirus situation and its impact on US citizens abroad. Plus, they mention how the 2021 Foreign Earned Income Exclusion can be claimed:
- US citizens who live/have a home abroad and are expected to claim the FEIE, but couldn’t due to due to the pandemic, can still claim the tax benefit. For example, you were stuck in the US and couldn’t return to your foreign host country for more than 36 days because of the pandemic.
- US citizens whose income exceeded the stimulus check eligibility in 2020 and this prevented them from getting a check may still receive one in 2021. This is based on their current finances. Stimulus checks are refundable tax credits in 2020 called the Recovery Rebate Credit. Originally, these checks were calculated from previous years’ tax returns (i.e., 2019 tax return). However, an expat could still back claim the stimulus check if their income was lower last year (in 2020) than the previous years.
MyExpatTaxes is Here to Help
Whether you need tax support for the Foreign Earned Income Exclusion or other expat tax benefits as an American living abroad, our expert support team can help you every step of the way. The best way to check eligibility and tax benefits is to sign up through our app and walk through our expat tax software!
Do you need to make up for previous years and file expat taxes? Check out our affordable Streamlined program. You’ll be able to make up years of back taxes in a matter of hours.
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