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Tax Tips for U.S. Americans Abroad

The Foreign Income Exclusion 2019 Rules for US Expats

The Foreign Income Exclusion 2019 Rules for US Expats

Tax season for US expats happens all year round. From the April 15th deadline to automatic extensions into June, and filing deadlines into October, US expats can’t escape the tax responsibility that comes with living abroad. But taxes as an expat can be empowering. You can save some serious money and reduce your tax bill by something called the Foreign Earned Income Exclusion.

Known as the FEIE, this foreign earned income tax credit is a money-saving deduction. It can also be a breath of fresh air for expats. It can not only lower but completely eliminate your tax liability as a US expat. 

Interested to learn more? Read on to understand the rules for saving money through the Foreign Income Exclusion 2019 for US expats.

Understand Exactly What FEIE is as a US Expat

It’s important to know exactly what you are going to get involved with if you as a US expat decide to utilize the Foreign Earned Income Exclusion.

The FEIE (or Form 2555) is a tax benefit that allows you to exclude a certain amount of foreign earned income from being taxed from the IRS. For 2019, the tax year is for 2018. From this, you can exclude up to $103,900 of money earned outside the US. For the 2019 tax season, the foreign earned income exclusion amount is increased to $105,900.

How do I calculate my foreign earned income, for the exclusion?

  • Let’s say you earned $112,800 as a foreign income in 2018. Subtract the maximum exclusion rate ($103,900) from your yearly salary leaving $8,900 that becomes taxable by the IRS.
  • Something to remember is that the taxable amount is taxable at the rate applying to what you originally earned. It’s called the stacking rule, and your exclusion will only apply to foreign earned income too! 

Any other income from pension funds, interest, capital gains, etc cannot be excluded from the IRS foreign income exclusion. Also, you can increase your foreign exclusion with qualified housing expenses as well.

The maximum FEIE amount is only available for those who were qualified to use FEIE for the entire tax year! Otherwise, that FEIE amount is prorated based on the number of your qualifying days.

Know What is and What is Not Covered for FEIE

Some of the income you receive as a resident of a foreign country may not actually qualify for the IRS Foreign Earned Income Exclusion. For example, the IRS has listed out the following types that cannot be covered:

  • Pay for work in international waters
  • Pay received as an employee of the US government or related agency
  • The values of meals and lodging are excluded from income since it was furnished for the convenience of the employer
  • Payments received after the end of the tax year in the subsequent year that services were performed
  • Pay in specific combat zones
  • Pension or annuity payments, and benefits like social security 

Stay Updated for Maximum Amount Changes

Planning on taking up the most of what the Foreign Earned Income Exclusion has to offer? It’s important to stay up to date on the changes regarding the maximum amount. Every year, inflation within the country happens, so whatever the maximum amount for last year was, it will probably be different for the coming year.

Even though we are in the year 2019, US expats must file federal income taxes from the last year (2018). So for the 2018 tax year, the maximum amount you can exclude for paying taxes from your foreign income to the IRS is $103,900.

As we approach 2020, the maximum amount for the tax year 2019 is going to be different than the year before. So US expats, the maximum amount has risen to $105,900 for the 2019 tax year! This means you can exclude up to this amount from taxation (sounds pretty good to us…).

You can always be sure we at MyExpatTaxes will keep you updated on the tax changes and FEIE info that happen throughout the year. Better yet, instead of reading our blogs to stay updated on the changes, trust that our software provides everything you need for the tax year, along with wholesome support for your individual tax profile. 

Make Sure You Qualify for Foreign Earned Income Exclusion

It’s necessary to know if you are even eligible to use the exclusion. Otherwise, you’ll be putting your time and effort into nothing.

The first thing you can do to see if you qualify for the FEIE is by using either the bona fide residence test OR physical presence test:

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.

If you end up qualifying for the FEIE from passing one of the tests, you may also be able to get foreign housing deductions. 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.

Claim Your Foreign Earned Income Exclusion

Once you are certain you qualify for the FEIE, you can now get started! You can do the work manually by completing the Form 2555 or Form 2555-EZ.

Form 2555 is the standard form for the Foreign Earned Income Exclusion. Form 2555-EZ is only for US expats who are NOT planning to use foreign housing deductions in conjunction with the FEIE. Please note that the EZ version of the Form 2555 is discontinued after the 2018 tax season.

Once you complete the form, please attach it to your Federal Tax Return, put it in an envelope, stamp, and send it on its way!

For a more easier, eco-friendly solution, just hop onto our app and get ready for a smooth ride. Our friendly team and tax preparers can also answer any tax-related questions you have along the way. We answer questions every day regarding points like qualifying children for the family tax credit, the appropriate filing status (like married filing jointly), and more!

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15 Comments

  1. Avatar Peter on February 21, 2020 at 12:50 am

    Hi. I live abroad, make less than the FEIE threshold, and so am not liable to pay U.S. income taxes. If I have capital gains from short-term stock sales (held for less than a year), then what is my capital gains tax rate if I don’t have to pay U.S. taxes because I qualify for FEIE?

    Thanks so much!

    • Markus Markus on February 22, 2020 at 12:35 pm

      That’ll depend on how much your earnings where – best would be to create an account with us at https://app.myexpattaxes.com and enter your data so that the software can make a full assessment of your situation.

  2. Avatar Mike McMillan on February 22, 2020 at 11:16 pm

    I am dual US/UK citizen, live in the UK (30+ years) and retired last year with no employment income for 2019. I have a UK pension and received a net lump sum payment of £50,000 in 2019. (HMRC withheld approx 25% UK tax on my gross lump sum withdrawal). My question: if I use the foreign tax credit for the UK HMRC withholding, will I lose my U.S. personal exemption? In other words, can I still claim the personal exemption as well as utilise the foreign tax credit?

    • Markus Markus on February 26, 2020 at 10:22 am

      Hi Mike!
      The Tax Cuts and Jobs Act of 2017 suspended the Personal Exemption in conjunction with the Foreign Tax Credit. You can find the details here:
      https://www.irs.gov/publications/p514

  3. Avatar justin on February 26, 2020 at 10:06 pm

    “Please note that the EZ version of the Form 2555 is discounted after the 2018 tax season.”

    What does it mean for a form to be discounted? I guess your spell check put the wrong word

    • Michelle H. Michelle H. on March 2, 2020 at 12:18 pm

      Oops, we meant ”discontinued.” I just corrected it. Thanks for pointing that out!

  4. Avatar Ben on February 28, 2020 at 6:01 am

    HI. I lived in Germany for the entire year in 2019 and am planning to take the FEIE. However, I also contributed 6K to a Roth IRA, without knowing at the time that I would incur a penalty if I take the FEIE. My income level is just above the max FEIE, but not enough above to allow the full Roth Contribution. My question: Do I have to take the full FEIE, or can I only take most of it so that my Roth contribution is valid? If I can take a partial, how do I do this?

    Thanks!
    Ben

    • Markus Markus on March 25, 2020 at 9:13 pm

      Hi Ben!

      It would probably be more beneficial to switch to the Foreign Tax Credit, but best would be to create an account with us so that we have the full picture of you information.

  5. Avatar John on March 4, 2020 at 8:42 am

    I work in one of the qualified combat zones. I rotate back to the states for vacation every two months. Then I come back to work for two months. I only earn my income in the foreign combat zone country. Would I qualify for any of the fie? Also, I work and lived at two different combat zone countries within the tax year.

    • Markus Markus on March 25, 2020 at 9:18 pm

      Hi John, I’m afraid you wouldn’t qualify for the FEIE because you wouldn’t pass the physical presence test. If you’d like us to look into you situation a bit more, please reach out to support@myexpattaxes.com so we can discuss the details not in this public forum.

  6. Avatar Melissa on March 9, 2020 at 5:34 am

    Hi! My family and I have lived in Taiwan for the 2019-2020 school year. We may end up going home early if our school goes back to Online Learning because of the Coronavirus. What kind of financial penalty will we face if we were not out of the US for the full 330 days? We all have an Alien Resident Card in Taiwan and make less than the $103,000.

    • Markus Markus on March 25, 2020 at 9:03 pm

      You won’t be able to exclude you foreign earned income – did you pay taxes in Taiwan? Then we could use the Foreign Tax Credit instead.

  7. Avatar Jay on March 25, 2020 at 4:24 pm

    If, one year, taking the FEIE on Form 2555 would actually result in a higher tax burden, can we – withOUT revoking the election of the FEIE – simply NOT file Form 2555, NOT exclude the foreign earned income, NOT take a foreign tax credit on the foreign tax paid on that income, and include the foreign income in our US taxable income calculations?
    Or does the FEIE election = MUST file Form 2555 and include all foreign earned income on it every year no matter what?
    thanks.

    • Markus Markus on March 25, 2020 at 9:31 pm

      Hello Jay – it would be best to move this conversation to support@myexpattaxes.com so that we could go into more details. I’m struggling right now to think of a scenario where excluding your foreign income would result in a higher tax burden.
      If you could send me more details to the support email, that would be helpful!

  8. Avatar Jay on March 27, 2020 at 8:57 am

    Thanks very much for the response, Markus. I agree, in principle, it should always be better to take either the FEIE or the FTC. However, my question is one of the IRS rules, not of the better choice.
    Having elected the FEIE, is it allowed by the IRS to simply NOT file Form 2555 one year, to NOT exclude that foreign earned income (and, clearly, to also NOT take any credit for any foreign tax paid on that income that COULD have been excluded)? Or, having elected the FEIE, MUST all FEI (and the resulting exclusion) be included on a Form 2555 every year?
    thanks.

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