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U.S. Source Income vs. Foreign Income

A lot is said about the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC) in the U.S. expat community, but little is said about how income is classified. The IRS tax rules state that for both the FEIE and the FTC stipulate that the income being excluded or used for credit must be foreign earned income. But sometimes determining where your income is sourced can be the tricky part.

In general, the IRS classifies income based on where it is earned. Consequently, if you’re working abroad, your income is considered foreign earned. However, if you’re working in the U.S. your income is then considered U.S. earned income (pretty straight forward). However, it should be noted that this holds true, whether a U.S. or a foreign company is paying you while you are in the U.S.

We’ll give you an example to illustrate this point, meet Mark, a U.S. expat like yourself!

(Everyone: “Hi Mark”)

Mark typically works in Spain for Proctor and Gamble. In this scenario, his income can be classified as foreign earned income because he is working abroad. Quite straight forward.

Once a year, Mark takes a business trip back to the states for Proctor and Gamble. The income earned on this business trip cannot be excluded as foreign earned income, because it was not earned abroad.

Even if Mark was always paid in a foreign currency and it was always deposited into his foreign bank account, this portion of his U.S. earned income will have to be separated out from his foreign earned income exclusion claim.

Don’t worry, My Expat Taxes will help sort out what can and cannot be excluded as foreign earned income for you 😉

This difference is important to note because all your income earned worldwide must be reported on your U.S. tax return, both foreign and U.S. earned. That doesn’t always mean you’ll have to pay taxes on foreign earned income as there are several tax considerations that can be applied.

These include the Foreign Earned Income Exclusion, which allows you to exclude up to $102,100 of foreign earned income from your 2017 U.S. taxes and the Foreign Tax Credit, which prevents you from being double-taxed on your foreign earned income.

However, keep in mind that everyone’s tax situation is different. And if you have foreign earned income on your tax return, be sure to consider all the possibilities that are available to you to mitigate any potential tax complications.

So You Need To File?

Does it still sound confusing? We understand. As we expressed in the beginning, we know that tax season is extremely stressful even when you live in America, more so when you’re not in America anymore! It seems like all the software solutions out there forgot about us American expat taxpayers and personalized services want to charge us upwards of $500 – $800 just to file! This is why we founded My Expat Taxes because we know that moving abroad is hard enough, but your taxes shouldn’t be…

We are currently in the process of launching a limited version of our application and we invite you to apply as a beta user. Our full product is scheduled to be released for the 2018 Tax Season. So apply now and stay in the loop so you can file your taxes easily and stress-free while abroad!

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2 Comments

  1. Avatar Daniel Marks on September 16, 2019 at 10:10 am

    I was curious about a hypothetical situation. Let’s say I’m a US citizen, who lives abroad, and works remotely for a company based in the US. Would I qualify for the $100k Foreign Earned Income Exclusion tax credit? If I made 100k or less in a tax year, does that effectively mean I owe nothing to the US for that year?

    Also, is there a difference of whether I am paid via direct deposit into my US bank account, or via wire transfers into my foreign account?

    (For the sake of example, let’s say I am an official resident of a state without income taxes)

    • Markus Markus on September 16, 2019 at 10:39 am

      Hi,

      asking for a friend? 🙂
      Yes, if you live abroad in a country (I’m assuming you meant country and not state) that does not collect income taxes, and if you make less than the threshold, you would not owe income tax to the US and would obviously also not owe income tax to your resident country.
      There’s a few more things to consider, though: For the FEIE, you have to live abroad for pretty much the full year (330 days). If you travel to the US on a semi-regular basis, you won’t pass the bona fide residence test. If your US employer doesn’t operate a local branch, you might also have to work under a self-employment status, which means that you’d owe the 15.3% self employment tax to the US.
      As is often the case with tax law: The answer is not that simple.

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