In 2023, the Foreign Earned Income Exclusion (FEIE) is the largest source of tax benefits for US expats. Also known as the FEIE, it’s a money-saving deduction that helps millions of expats prevent double taxation. It can even eliminate your tax liability as an American abroad altogether. That’s one powerful form.
What is the Foreign Earned Income Exclusion or FEIE?
To claim the Foreign Earned Income Exclusion in 2023, you’ll file form 2555 on your US tax return. It allows any qualifying American expat to exclude a certain amount of foreign-earned income from being taxed by the IRS.
According to the IRS, for the tax year 2022 (filed in 2023), you can exclude up to $112,000 of foreign-sourced income. It only applies to money you made outside the US. Every year the exclusion rate increases. That’s good news!
How to Claim the Foreign Earned Income Exclusion?
To claim these tax benefits while living abroad, you’ll need to fulfill the following criteria. First, you earn foreign income. Second, your current tax home must qualify as a foreign tax home. Finally, you must meet one of the two following residency definitions.
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 ($112,000 for TY2022).
Physical Presence Test: You will need to be outside of the US (ie: physically present living abroad) 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.
Additionally, if you do qualify to use Foreign Earned Income Exclusion, you may also be able to get foreign housing deductions for you and family members. We’ll discuss more on that later.
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 $117,800 as foreign income in 2022. She can subtract the exclusion rate of $112,000 from her yearly salary. This leaves her with $5,800, which is taxable by the IRS.
Tip: 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. 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.
Are Pension Funds, Interest, and Capital Gains Eligible?
Unfortunately, interest, pension funds, and capital gains cannot be excluded this way because they are not considered earned income. However, you can reduce your tax liability even further with qualified housing expenses.
The Foreign Housing Exclusion can allow excluding qualified housing expenses like rent, utilities, or repairs from taxation.
Income Not Covered in Foreign Earned Income Exclusion
Some types of income do not qualify for FEIE benefits. Some examples include: pay for work in international waters, pay received as an employee of the US government or related agency, and more.
Can I use the FEIE, and if yes, how much would be tax-deductible if I use the FEIE?
Yes! The Foreign Earned Income Exclusion applies 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 2022 tax rate is at $112,00, you can exclude all your foreign-earned income as taxable income from the IRS.
Make sure that your travel to the US was limited and that you were physically outside the US for 330 full days in a qualifying 12-month period. Also, beware of the US self-employment tax, which is separate!
Can the Foreign Earned Income Exclusion apply to my state income?
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 could not be applied to FEIE.
What qualifies as foreign income?
Income depends on where you perform the work. It doesn’t matter where the company or your bank account receiving the funds is based! If you work and live abroad full-time and work remotely for a US-based company, it is still be considered foreign-sourced earned income. Making it eligible for the FEIE.
Ready to Claim the FEIE?
The Foreign Earned Income Exclusion rate changes every year due to inflation. We’ll share with you every year on our blog about the new tax changes and laws so you can stay updated.
Otherwise, you can trust that our software will provide everything you need for the coming tax year. We even offer support for Greencard holders. We can help you file for previous years, through our smooth, Streamlined Procedure process.
MyExpatTaxes automatically determines if you should include the FEIE on your annual tax return. Or you could always manually complete Form 2555. This is the standard form, which now includes foreign housing deductions. Just the form attach it to your tax return and put it in the mail.