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. In 2023, one of them is called the Foreign Earned Income Exclusion, and it’s for US expats. From this, it’s important to understand what benefits you qualify for (benefits like FEIE) and how they impact your finances.
What is the Foreign Earned Income Exclusion for US Expats?
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, US Expats must meet the qualifications (see below). And they must claim this benefit on their 2022 tax return.
US tax returns for Americans abroad are due by June 15th. The June date reflects an automatic two-month extension deadline for expats. However, if you still need more time, additional tax extensions are possible.
Qualifying for the Foreign Earned Income Exclusion in 2023
To see whether you qualify for the 2023 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 live outside of the United States for 330 full days in a consecutive 12-month period. And that period begins or ends in the tax year. This also applies if you move abroad within that 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 2022 Foreign Earned Income Exclusion tax benefit.
FEIE Income Exclusion Rates
According to the IRS, Americans abroad can exclude up to $112,000 of foreign-sourced income for the 2022 tax year. TIP: when you are filing in 2023, you are filing for the 2022 tax year. This income is solely money you have made outside of 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.’’Source: IRS
Due to inflation, the IRS raises the Foreign Earned Income Exclusion will typically increase each year. This gives US expats a chance to save big money every time.
How to Calculate your FEIE
To calculate your foreign earned income for the Foreign Earned Income Exclusion as a US citizen abroad in 2023, you can do the following:
- Subtract the minimum FEIE exclusion rate of 2022 – $112,000 – from your yearly foreign earned salary in 2022. If you have any remaining amount of money, it becomes taxable for the IRS.
The taxable amount is taxed according to the stacking rule. That means the taxable amount will be taxed at the rate applied to what you originally earned.
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!
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