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Archive for Foreign Earned Income Exclusion

Tax Court In Brief: Foreign Earned Income Exclusion (FEIE) For A U.S. Citizen

JASON FREEMAN, JD - Foreign earned Income Exclusion

Short Summary:  This case discusses the applicability of the foreign earned income exclusion (FEIE) for a U.S. citizen residing in Saudi Arabia deriving income in such jurisdiction.

Alfred Christopher Morgan (Mr. Morgan) a U.S. citizen and retired military, resided in Saudi Arabia during 2016. He worked there as a quality control manager for a Saudi Arabian’ company. He worked 9 hours per day, 5 days a week. During the weekends, he traveled to close foreign countries (Bahrain, Dubai, etc.) for recreational purposes. In Saudi Arabia, he was the president of a social club, the Worldwide Fraternity of Turtles. He lived in an employer-facility and he had obtained Saudi Arabian proof of residence (Iqama), medical insurance and a driver’s license in Saudi Arabia. Mr. Morgan also was engaged to a long-term resident of Saudi Arabia.

In the U.S., Mr. Morgan had a home where his daughter used to live. He was the sole financial responsible person for maintaining the property. Although Mr. Morgan had his family (mother, daughter, brother, and sisters) living in the U.S., he barely visited them. During 2016, he visited his mother and daughter for approximately two and one week respectively. He did not provide financial assistance to his immediate family. He did not visit any medical provider in the U.S., but he retained medical insurance provided to retired military and his driver’s license.

Mr. Morgan did not file his 2016 tax return. The IRS prepared a substitute for return including in his gross income the income he derived from Saudi Arabia. Mr. Morgan challenged the deficiency in the Tax Court and claimed that the FEIE applied and thus, his foreign earned income should be excluded under I.R.C. § 911(a)(1). The Court determined that his income should have been excluded as he met the requirements of the FEIE.

Key Issues: Whether Petitioner was entitled to exclude his income from Saudi Arabia under the FEIE  § 911(a)(1) of the I.R.C.

Primary Holdings: Petitioner was entitled to exclude his foreign earned income as he met the FEIE requirements, because he met the “physical presence” test and his tax home was determined to be located in Saudi Arabia.

Key Points of Law:

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Foreign Earned Income Exclusion For US Expats

OLIVIER WAGNER - 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?

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Written by | Posted in Expatriate Taxes • Foreign Earned Income Exclusion

Foreign Earned Income Exclusion

Foreign Earned Income Exclusion

U.S. citizens and resident aliens who live abroad are taxed on their worldwide income.  But such taxpayers may qualify for the foreign earned income exclusion, which allows certain taxpayers to exclude up to $112,000 (in 2022) of their foreign earnings from income, as well as to exclude or deduct certain foreign housing costs.  Note, however, that not all U.S. expats qualify to take advantage of the foreign earned income exclusion.  In addition, business owners may be subject to other complications and taxpayers residing in countries that have tax treaties with the United States may have certain tax planning opportunities.

The Foreign Earned Income Exclusion: The Basic Requirements

To qualify for the foreign earned income exclusion, the taxpayer must have (i) foreign earned income, (ii) a tax home in a foreign country (the “tax home” test), and (iii) the taxpayer must be one of the following:

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New Foreign Earned Income Exclusion Rules

New Foreign Earned Income Rules

The bona fide residence test and physical presence test generally provide specific time requirements that apply to individuals claiming a tax exclusion for foreign-earned income. An otherwise qualified individual may still exclude foreign earned income for the period in which the individual was actually present in the foreign country even if the individual fails to meet the time requirements.

What are the bona fide residence and physical presence tests that can allow a U.S. individual to qualify for the foreign earned income exclusion?

A U.S. individual with foreign earned income must satisfy either the bona fide residence test or the physical presence test in order to be eligible to exclude all or a portion of foreign earned income from U.S. income (see Q 964).

Editor’s Note: The IRS relaxed these requirements for 2020 in response to travel restrictions put in place in response to COVID-19. An otherwise qualified individual may still exclude foreign earned income for the period in which the individual was actually present in the foreign country even if the individual fails to meet the time requirements. To qualify for relief, an individual must establish (1) he or she must have established residency, or have been physically present in either: China on or before December 1, 2019, or any other foreign country on or before February 1, 2020 and (2) the individual must have departed either: China (excluding Hong Kong and Macau) between December 1, 2019, and July 15, 2020, or any other foreign country between February 1, 2020, and July 15, 2020 and (3) individual would have met the requirements of either the bona fide residence test or the physical presence test, but for the COVID-19 emergency.[1]
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The S. 911 Foreign Earned Income Exclusion: It’s Origins, Journey, Opportunities And Limitations

John Richardson

I recently participated in a podcast discussing both the opportunities and limitations associated with the Section 911 FEIE (“Foreign Earned Income Exclusion”). It is short and explains why the FEIE is not the answer to the problems experienced by Americans abroad. You can listen to it here:

https://prep.podbean.com/e/us-taxation-of-americans-abroad-do-the-foreign-tax-credit-rules-work-sometimes-yes-and-sometimes-no/

The podcast was the subject of a post at American Expat Finance. That post prompted me to explore more deeply, the origins of the FEIE. When was it enacted? What was it designed to do? I found a fantastic article that I thought I would/should share.

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Written by | Posted in Foreign Earned Income Exclusion • Section 911 • TaxConnections

How To Qualify For Foreign Earned Income Exclusion

To claim the foreign earned income exclusion, you must meet all three of the following requirements:

  1. Your tax home must be in a foreign country
  2. You must have foreign earned income
  3. You must be one of the following:
  • A U.S. citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year.
  • A U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect, and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year.
  • A U.S. citizen or a U.S. resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.

There are only two of the factors to be considered in determining whether you pass the bona fide residence test: the length of your stay and the nature of your job. You need to remember that you do not automatically acquire bona fide resident status just by living in a foreign country or countries for one year and your bona fide residence is not necessarily the same as your domicile. If you made a statement to local authorities in your residence country that you are not a resident of that country, and they determine you are not subject to their income tax laws as a resident, you can’t be considered a bona fide resident.

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Written by | Posted in Expatriate • Expatriate Taxes • Foreign Earned Income Exclusion

The Reality Of Owning A Controlled Foreign Corporation After Trump’s Tax Reform

Do you know that owning a Controlled Foreign Corporation got affected by New Tax Bill? In a nutshell, Trump’s tax reform now means that all income is Subpart F income. In addition, all currently untaxed retained earnings will be subject to a one-time tax. Read further if you want to find out what it means exactly and how U.S. expats with CFCs are affected.

Let’s take a quick look at a few changes that were introduced in recent tax legislation. Generally, Trump’s tax reform benefits individuals who are struggling with their finances by doubling standard deductions, i.e. from $6,000 to $12,000 for singles, and reducing the rates for five tax brackets of the existing seven. Read More

Written by | Posted in CFC • Foreign Earned Income Exclusion

FBAR Penalties Rise Again Due To Inflation

As with many numbers in the U.S. tax code (for example, the foreign earned income exclusion maximum amount), FBAR penalties increase periodically due to inflation.

Recently, the IRS announced that FBAR penalties for noncompliance would be increased for penalties assessed after January 15, 2017. A brief summary of the FBAR requirement and the new penalty amounts are the subjects of this blog.

The FBAR Requirement – A Quick Background Read More

Written by | Posted in FBAR • Foreign Earned Income Exclusion • Inflation • IRS • TaxConnections

How Does The Foreign Earned Income Exclusion Work?

Living and working abroad comes with many exciting benefits. In addition to exploring new lands and learning about new cultures, expats often earn additional income beyond just their regular salary. Foreign earned income can come in many forms. In addition to the wages that are earned, those who are working outside the United States also must declare as income bonuses, tips, commissions, and the like.
It is also common for expats working overseas to have non-cash income as part of their employment package.

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Written by | Posted in Foreign Earned Income • Foreign Earned Income Exclusion • TaxConnections

Foreign Earned Income Exclusion For U.S. Expatriates

Even if you have left the United States for a brighter future elsewhere, you  (something not as strong) take a moment and think about any obligations you have towards the IRS. The US retains its right to tax globally its citizens and resident aliens who are a citizen or national of a country with which the United States has an income tax treaty in effect. Only two countries have such a citizenship-based taxation system: the United States and Eritrea.

What Is A Foreign Earned Income Exclusion For U.S. Expats?

The Foreign Earned Income Exclusion (FEIE) is offered to US citizens and resident aliens that are living abroad on a consistent basis, have earned income in a foreign country and can prove that they have done so for the past tax year by satisfying either the Physical Presence Test or the Bona Fide Residence. Read More

Written by | Posted in Expatriate • Expatriate Taxes • Foreign Earned Income Exclusion

U.S. Tax Considerations For The Digital Nomad Living Abroad

In today’s age of “digital nomads,” the idea of working remotely overseas continues to grow in popularity. New programs, such as Remote Year, have further facilitated overseas commuting by organizing year-long trips for employees and freelancers to live in multiple cities abroad. Participants, for example, travel in groups to live in multiple cities throughout Europe, Asia and South America, for one month each over a year period.

Working abroad presents a number of unique U.S. income tax issues and opportunities for the digital nomad.  One main issue is qualification for the Foreign Earned Income Exclusion (“FEIE”), which allows U.S. citizens living abroad to exclude their foreign earned income from U.S. federal taxation. Another important issue is a digital nomad’s potential liability for state and local taxation even during their time living and working abroad. Read More

Written by | Posted in Foreign Earned Income Exclusion • Tax Home
 
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