Tax Tips for U.S. Americans Abroad
One incredibly important expat tax benefit is the Foreign Earned Income Exclusion for US expats. Known as the FEIE, it’s a money-saving deduction that can help millions of expats prevent double-taxation. Even more so, the Foreign Earned Income Exclusion can completely eliminate your tax liability as an American abroad.
What is the Foreign Earned Income Exclusion
Essentially, the FEIE is Form 2555 on a US tax return. It allows any qualifying and taxpaying American expat to exclude a certain amount of foreign earned income from being taxes from the IRS.
According to the IRS, For tax year 2019 (which is in 2020), you can exclude up to $105,900 of foreign sourced income. This is strictly the money you made outside the US. Then, for the 2020 tax season (in 2021), you can exclude up to $107,600. Every year the exclusion rate goes up, meaning you have more opportunities to save big.
How to Claim the FEIE
As a US expat who wants to claim the tax benefits from living abroad, you’ll need to fulfill the following criteria: You earn foreign income, your current tax home is in a foreign country, and you must fit one of the following:
Bona Fide Residence test: Answer this: Were you a registered resident and subject to local income taxes in your host country for at least a full calendar year? Then you can claim the Foreign Earned Income Exclusion for up to the maximum amount ($105, 900).
Physical Presence Test: You will need to be outside of the US for 330 full days in a consecutive 12 month period, that begins or ends in the tax year. If yes, you qualify for the FEIE.
Even if you have been in the US for more than 36 days in the tax year, there is a possibility you could still 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.Source: 2019 FEIE Rules Blog.
Additionally, if you end up qualifying for the FEIE from passing one of the tests, you may also be able to get foreign housing deductions (see more below).
Calculating Your Foreign Earned Income
As an American abroad, you may ask how to calculate your foreign earned income, for the FEIE. We have an example here:
Monica works for a foreign company in Switzerland. She earned $114,500 as foreign income in the 2019 year. She can subtract the minimum exclusion rate of $105,900 from her yearly salary. This leaves her with $8,600 which becomes taxable for the IRS.
Remember, the taxable amount is taxable according to the stacking rule. This is when the taxable amount will be taxed at the rate applied to what you originally earned. Plus, the Foreign Earned Income Exclusion is available only for US expat taxpayers who qualify to use the expat tax benefit for the entire tax year.
Pension Funds, Interest and Capital Gains
Unfortunately, interest, pension funds, and capital gains cannot be excluded from the Foreign Earned Income Exclusion by the IRS. But, you can increase the FEIE with qualified housing expenses. This can help you reduce your tax liability even more!
The Foreign Housing Exclusion can allow excluding qualified housing expenses like rent, utilities, or repairs from taxation. Check out this blog to learn more about this feature for families.
Income Not Covered in Foreign Earned Income Exclusion
There are actually types of income that do not qualify for the IRS benefit. Here are some examples: Pay for work in international waters, pay received as an employee of the US government or related agency, and more. Check out our 2019 FEIE Rules Blog for more information.
Your FEIE Questions Answered
Q: I earned $60,000 as a freelancer, traveling all around the world. Can I use the FEIE, and if yes, how much would be tax deductible if I use the FEIE?
A: Yes, Foreign Earned Income Exclusion is applicable to Self-Employment Income as it is earned income, and in your case, you can prevent your earned freelance income from being double-taxed. Since the FEIE for 2019 taxe rate is at $105,900, you can exclude all your foreign earned income as taxable income from the IRS.
Just make sure that your travel to the US was limited and you were physically outside the US for 330 full days in a qualifying 12 month period. Also beware of US self-employment tax, which is separate!
Q: Can the Foreign Earned Income Exclusion apply to US state income?
A: No. Since the FEIE is solely a tax benefit for US expats, and for income earned outside of the US, it cannot apply to state income. So if you worked physically in a US state, the income earned during that period cannot be applied to FEIE.
Q: If my company is based in the US, but I am a US citizen abroad and receive US money via direct deposit, what qualifies as foreign income?
A: Income is sourced where you perform the work, not where the company or your bank account receiving the funds is based! So if you work and live full-time abroad and work remotely for a US-based company, it will be considered foreign sourced earned income and eligible for FEIE.
Ready to Claim the FEIE?
The Foreign Earned Income Exclusion rate changes every year due to inflation. So every year you can save even more money through this benefit. Plus, we’ll share with you every year on our blog about the new tax changes and laws so you can stay up to date.
Otherwise, you can trust that our software will provide everything you need for the coming tax year. We even offer support for Green card holders. Plus, we can help you file for previous years, through our smooth Streamlined Procedure process.
So once you’re certain you qualify for the FEIE, you can manually complete Form 2555. This is the standard form, which now includes foreign housing deductions. Once the form is filled out, you can attach it to your tax return and put it in the mail.
If you want to take the easy route, file the Foreign Earned Income Exclusion through our DIY expat tax software for only 149 Euro.