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Foreign Earned Income Exclusion for US Expats

Even if you’ve moved abroad for a brighter future, you still might have obligations towards the IRS. What happens if you earn income from sources outside the United States? If you live abroad, you might qualify for the foreign earned income exclusion (FEIE). This article explains what FEIE is and how it works, and provides some examples of situations where you might benefit from claiming it.

The U.S. retains its right to tax citizens and Green Card holders who live abroad and they must file their taxes even if they’re not physically present in the country. The foreign earned income exclusion (FEIE) allows U.S. taxpayers to exclude from their taxable income certain amounts they earn outside the United States. The FEIE was created in 1954 to relive American Citizens from the burden of double taxation when they move overseas.

WHAT IS THE FOREIGN EARNED INCOME EXCLUSION?

The Foreign Earned Income Exclusion is an IRS exclusion that American expats can use to reduce their taxable income (or in some cases completely eliminate) i.e. their U.S. tax owing. It is the most common and the most widely used tool to reduce US expat tax owing that the IRS offers.

You don’t automatically receive the benefit of FEIE by just living abroad — you must meet specific qualifications which we will discuss later and submit the Form 2555.

HOW MUCH FOREIGN EARNED INCOME CAN YOU EXCLUDE?

U.S. citizens and resident aliens who meet certain requirements to exclude up to $120,000 of foreign-earned income in 2023 (The FEIE is adjusted every year for inflation). If used correctly, the FEIE can help you save thousands of dollars on your US taxes.

The maximum exclusion for 2024 is $126,500. If you’re filing under the married filing jointly status and your spouse also meets the FEIE requirements, you can exclude up to $253,000 of your foreign income in 2024.

FILING FOR THE FOREIGN EARNED INCOME EXCLUSION: A GUIDE FOR MARRIED COUPLES FILING JOINTLY

On July 19, 2019 the IRS announced six new compliance initiatives.

Of particular interest to U.S. citizens and permanent residents (Green Card holders) is what is described as:

Expatriation

U.S. citizens and long-term residents (lawful permanent residents in eight out of the last 15 taxable years) who expatriated on or after June 17, 2008, may not have met their filing requirements or tax obligations. The Internal Revenue Service will address noncompliance through a variety of treatment streams, including outreach, soft letters, and examination.

What is expatriation?

From a tax perspective, expatriation is the process of ceasing to be a “tax resident” of the United States. Both U.S. citizens and permanent residents are taxable by the United States on their worldwide income. A U.S. citizen expatriates by relinquishing U.S. citizenship. A permanent resident expatriates by either surrendering their Green Card or making an appropriate election under a tax treaty.

Written by John Richardson | Posted in Expatriate Compliance Campaign