We get all sorts of fascinating questions from established US taxpayers in addition to those experiencing internationalism for the first time. It seems, regardless of the degree of sophistication in US income tax filing obligations, most people are out to lunch when it comes to arcane acronyms and filing requirements.

Complicating matters is the fact that there are distinct difference to consider between:

• • Foreign Earned Income Exclusion (FEIE) – Form 2555
• • Foreign Tax Credit (FTC) – Form 1116

As well as between:

• • Foreign Bank Account Reporting (FBAR) – FinCEN Form 114
• • Foreign Financial Asset Reporting (FATCA) – Form 8938

Many US Taxpayers simply find the distinctions between these forms mind numbing, as they should. If you are still with me today’s post focuses on FEIE.

Foreign Earned Income Exclusion (FEIE)

 

Foreign Earned Income, as per 26 CFR 1.911-3, is income received for services you perform in a foreign country. Your main place of business, employment, or post of duty must be in a foreign country(s) and you cannot have an abode in the United States during the same period. To claim the foreign earned income exclusion, foreign housing exclusion, or foreign housing deduction, you must make a valid election on your tax return and you must:

• • be a U.S. citizen or resident alien
• • have foreign earned income
• • have a foreign tax home
• • meet either the Bona Fide Residence Test or the Physical Presence Test.

In other words to qualify you must have foreign earned income and meet the tax home test AND either the bona fide residence test or the physical presence test.

Top 12 Lessons Learned about FEIE

 

• 1. You must file a return even if you have no tax liability after claiming the exclusion.
• 2. File Form 2555 or 2555-EZ with your U.S. Income Tax Return, Form 1040.
• 3. If you qualify you could exclude the smaller of: $100,800 (adjusted annually) or your foreign earned income for the tax year minus your foreign housing exclusion
• 4. If you are married both spouses may claim a foreign earned income exclusion as long as both spouses meet the requirements. A separate Form 2555 or 2555-EZ must be filed for each spouse.
• 5. If you and your spouse lived in separate foreign households, you each can claim qualified expenses for your own household only if your tax homes were not within a reasonable commuting distance of each other, and each spouse’s household was not within a reasonable commuting distance of the other spouse’s tax home. Otherwise, only one spouse can claim his or her housing exclusion or deduction. This is true even if you and your spouse file separate returns.
• 6. You may be able to take a: Foreign housing exclusion (if an employee) or Foreign housing deduction (if self-employed). Complete Part VI of Form 2555 to claim the foreign housing exclusion or deduction.
• 7. You cannot claim the additional child tax credit if you claim either of the exclusions or the housing deduction.
• 8. You cannot exclude or deduct more than your foreign earned income for the year.
• 9. Excess exclusions can be carried over 1 tax year.
• 10. You may be able to use Form 2555-EZ if you did not: have any self-employment income for the year; your total foreign earned income did not exceed $100,800; you do not have any business or moving expenses; and, you do not claim the housing exclusion or deduction.
• 11. An election exists to apply higher limits on housing expenses. For 2014 you could elect to apply the 2015 limits on housing expenses as addressed in section 4 of Notice 2015-33. 
• 12. For more information please refer to the instruction set for IRS Form 2555 always keeping in mind that IRS instructions are NOT CONSIDERED SUBSTANTIAL AUTHORITY!