One of the most common tax relief measures available to U.S. expats is the Foreign Earned Income Exclusion (FEIE). If you qualify, you may be able to exclude all or part of your foreign salary/wages from your income when filing your U.S. federal tax return. Here are five key tips to keep in mind regarding the exclusion:

1.The FEIE requirements

 

Provided an individual is able to establish that his or her “tax home” is outside the U.S., and can satisfy either the bona fide residence test or the physical presence test, such individual can exclude a portion of their income earned overseas from their income.

Your tax home is the general area of your primary place of business, employment, or post of duty, regardless of where you maintain your family home. Your tax home is the place where you are permanently or indefinitely engaged to work as an employee or self-employed individual. You are not, however, considered to have a tax home in a foreign country for any period in which your “abode” is in the United States. “Abode” has been variously defined as one’s home, habitation, residence, domicile, or place of dwelling. The location of your abode often will depend on where you maintain your economic, family, and personal ties.

A U.S. citizen will satisfy the bona fide residence test if he or she resides in a foreign country for an uninterrupted period that includes the entire tax year. It is important to keep in mind that merely being in a foreign country for one full year does not automatically qualify an individual. The test is based on facts and circumstances. The length of your stay overseas and its nature are examples of key facts that the IRS will examine. Other factors include whether you purchased a home overseas, any declaration you may have made to the foreign authority indicating that you are not a resident of the country, and whether your family lives with you abroad.

An individual will qualify under the “physical presence” test if they are present in a foreign country for 330 full days during any period of 12 consecutive months. The 330 days do not need to be consecutive nor do they have to be in the same tax year.

2.The FEIE limitation amount

 

The FEIE amount is adjusted annually for inflation. For tax year 2015, the maximum exclusion amount is up to $100,800 per qualifying person. If filing individuals are married and both work abroad and meet either the bona fide residence test or physical presence test, each one can choose the foreign earned income exclusion. Together, you can exclude as much as $201,600 for the 2015 tax year. In addition to the FEIE, the foreign housing exclusion may be available with respect to certain housing costs incurred abroad.

3.Coordination with other credits or deductions

 

Once the foreign earned income exclusion is chosen, a foreign tax credit or deduction for taxes cannot be claimed on the excluded income. If a foreign tax credit or tax deduction is taken on any of the excluded income, the foreign earned income exclusion will be considered revoked. As an alternative to (and for higher income earners, in complement to) the FEIE, a U.S. expat can claim a foreign tax credit (FTC) for foreign income taxes paid.

Assuming sufficient credits are available (that is, your creditable foreign tax exceeds your U.S. tax on your foreign income), U.S. expat parents should consider the foreign tax credit because legislation was recently enacted providing that taxpayers who utilize the FEIE cannot claim the child tax credit (which may be refundable up to an amount of $1,000 per child). This limitation does not apply, however, when the FTC is utilized.

Additionally, excluding earned income under the FEIE can adversely affect one’s ability to qualify under retirement plans like an IRA, because this requires having reportable earned income. If you choose the FTC, however, you can report taxable earned income, which alleviates this adverse consequence.

4.The FEIE form

 

In order to choose the FEIE, an individual must file a U.S. federal income tax return (Form 1040) and attach Form 2555 to the return. Once you choose to exclude your foreign earned income or housing amount, that choice remains in effect for that year and all later years unless you revoke it.

What many expats don’t realize is that while the FEIE may eliminate the requirement to pay tax, it does not eliminate the obligation to file a tax return. In fact, in order to claim the FEIE, you actually need to file your return. Not filing on time may prevent you from being able to later make the claim on your return.

5.Revoking the FEIE

 

You can revoke your FEIE choice for any tax year. You do this by attaching a statement that you are revoking one or more previously made choices to the return or amended return for the first year that you do not wish to claim the exclusion(s). You must specify which choice(s) you are revoking. You must revoke separately a choice to exclude foreign earned income and a choice to exclude foreign housing amounts.

If you revoked a choice and within 5 tax years again wish to choose the same exclusion, you must apply for IRS approval. Because requesting a ruling can be complex, you may need professional help. Also, the IRS charges a fee for issuing these rulings.