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Foreign Earned Income For U.S. Overseas Taxpayers



John Dundon

The following was prepared by IRS Employees Bethany Barclay, Technical Specialist LB&I Division & Tracy McFee, CPA Technical Specialist LB&I Division regarding Foreign Earned Income Exclusion (FEIE).

Tracy and I met as guest panelists on the hit TV Show Tax Talk Today: Aliens, Immigration, and Taxes—Navigating the Shoals and I’ve grown to truly appreciate her knowledge base and skill set. She is a respectable public servant who I thank for allowing me to share her efforts in this venue.


Foreign Earned Income Exclusion (FEIE) – Who is eligible to claim it?

 

  • U.S. citizens and resident aliens who live and work in a foreign country and meet the requirements.
  • Not available to nonresident aliens.
  • You claim it on Form 2555/2555-EZ.
  • The exclusion amount is indexed annually for inflation.
  • You may also be able to exclude (if an employee) or deduct (if self-employed) the cost of foreign housing.

Foreign Earned Income Exclusion, Foreign Housing Exclusion, or Foreign Housing Deduction Requirements

 

  • You must have foreign earned income, and
  • You must have a foreign tax home, and
  • You must meet either the Bona Fide Residence Test or the Physical Presence Test, and
  • You must make a valid election.

What Is Foreign Earned Income?

 

  • Income for services performed in a foreign country
  • What matters is where the services were performed, not when or where the income was received.
  • If you are an employee: – Wages and salaries – Commissions – Bonuses – Tips – Allowances – Reimbursements – Other compensation – Noncash income such as lodging and meals
  • If you are self-employed: – Professional fees – If capital is a material income producing factor, a reasonable allowance for compensation (but no more than 30% of net profits)

What Is Not Foreign Earned Income?

 

  • Income paid by the United States or its agencies to government employees or to members of the U.S. armed forces, even if earned in a foreign country
  • Income earned in a U.S. territory
  • Income earned in Antarctica
  • Income earned in international waters or airspace
  • Pensions, annuities or social security benefits
  • Value of meals and lodging furnished for convenience of employer
  • Payment received after the end of the tax year following the tax year in which you performed the services that gave rise to the payment

Foreign Tax Home Requirement

 

  • Your regular or main place of business, employment or post of duty must be in a foreign country or countries, and
  • You cannot have an abode in the United States during the same period.
  • You can only have one tax home at any given time.

Location of Ties Determines Abode

 

  • Economic ties, such as: – Locations of bank accounts – Locations of real and personal property owned – In some cases, whether “excess housing costs” were incurred
  • Familial ties, such as: – Location of immediate family (spouse, children, parents) – Cultural background
  • Personal ties, such as: – Jurisdiction in which the individual voted / held driver’s license – Location of place of worship / social activities – Familiarity with language / extent of integration into the foreign culture

Bona Fide Residence Test

 

  • You must be either: – a U.S. citizen, or – a U.S. resident alien who is a citizen or national of a country with which the U.S. has an income tax treaty in effect.
  • You must be a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year (except for brief temporary visits to U.S. or elsewhere).

Bona Fide Residence Test: Factors to Consider

 

  • Intent
  • Establishment of home temporarily in the foreign country for an indefinite period
  • Extent of assimilation into life and society of foreign country
  • Physical presence in foreign country
  • Nature, extent and reasons for temporary absences
  • Whether paid taxes to foreign country
  • Whether spouse and children also resided in the foreign country

You are not considered a bona fide resident of a foreign country if:

 

  • You submitted a statement to the authorities of that country claiming to be a nonresident of that country, and either
  • Your income is not subject to tax in that country because you are a nonresident of that country, or such a determination has not yet been resolved.
  • An income tax exemption provided in a treaty or other international agreement is not considered a statement of non-residency.

Physical Presence Test

 

  • You must be physically present in a foreign country(s) for 330 full days during a period of 12 consecutive months.
  • The 12-month period may begin with any day.
  • The 330 days do not have to be consecutive, as long as they fall within a period of 12 consecutive months.
  • The number of qualifying days is based on the total number of days during the year in question that fall within your chosen 12- month measurement period.
  • Presence in a foreign country or countries need not be for business. Days spent on vacation (or for any other purpose) in a foreign country are also counted, so long as your tax home is still in a foreign country.

Physical Presence Test: Number of Qualifying Days

 

  • The 12-month period may begin before or after arrival in a foreign country, end before or after departure from a foreign country, and include days when you do not have a tax home in a foreign country.
  • You may maximize the number of qualifying days in the tax year by sliding a 12-month period forward or backward up to 35 days, so long as it still contains 330 full days of presence in a foreign country or countries.
  • Also, 12-month qualifying periods may overlap. Count each day in a given tax year only once, even if it falls within more than one qualifying period.

Waiver of Time Requirements

 

  • The minimum time requirements can be waived if an individual must leave a foreign country because of war, civil unrest, or other adverse conditions.
  • A list of countries which qualify for the waiver , and the departure dates, is published in an Internal Revenue Bulletin.

Waiver of Time Requirements You must show that:

 

  • you had a tax home in the foreign country, and
  • on or before the beginning date of the waiver, you reasonably could have been expected to meet the time requirements as a bona fide resident or under the physical presence test except for the adverse conditions.

Filing Requirements

 

  • You must file a return even if you have no tax liability after claiming the exclusion
  • File Form 2555 or 2555-EZ with your U.S. Income Tax Return (Form 1040) Making a Valid IRC § 911 Election
  • The election to exclude foreign earned income and the election to exclude the cost of foreign housing are separate elections.
  • You may make one or both elections by attaching Form 2555/2555 EZ to tax return for the first year for which it is effective.

Making a Valid IRC § 911 Election

 

  • Generally, the election(s) must be made with a: – Timely filed return (including any extensions), – Return amending a timely filed return during the claim period under IRC § 6511(a), or – Late-filed return within one year from the original due date of the return(without regard to extensions)

2015 Maximum Foreign Earned Income Exclusion

 

  • If you qualify, you could exclude the lesser of: – $100,800 (adjusted annually) or – Your foreign earned income for 2015 minus your foreign housing exclusion
  • If your qualifying period is less than a year, the limitation amount must be prorated.

Foreign Housing Costs

 

In addition to the foreign earned income exclusion you may be able to take a:

  • Foreign housing exclusion (if an employee) or
  • Foreign housing deduction (if self-employed) Note: Complete Part VI of Form 2555 to claim the foreign housing exclusion or deduction.

Effect on Credits or Deductions

 

  • Cannot take foreign tax credit or deduction for taxes on the excluded income
  • Not eligible for earned income credit
  • Must add back the excluded amount when computing modified additional gross income for purposes of child tax credit and/or additional child tax credit. Claiming the Exclusion
  • Both spouses may claim a foreign earned income exclusion and/or a housing exclusion/deduction, as long as each spouse meets the requirements.
  • A separate Form 2555 or 2555-EZ must be filed for each spouse. credit

Which Form – 2555 or 2555-EZ?

Use Form 2555-EZ if all the following apply:

  • U.S. citizen or resident alien Earned wages/salaries in foreign country
  • Total foreign earned income less than $100,800
  • Reported total foreign earned income on Line 7 of your 2015 Form 1040
  • Filing calendar year return for 12-month period
  • No self-employment income
  • No business or moving expenses
  • No foreign housing exclusion or deduction
  • No foreign housing deduction carryover

Completing Form 2555-EZ

 

  • Use the tax rates that would have applied if you had not claimed the exclusion(s).
  • See instructions for Form 1040 and complete the Foreign Earned Income Tax Worksheet.
  • If you owe must attach Form 6251, Alternative Minimum Tax—Individuals, use the worksheet in the Form 6251 instructions.
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I am enrolled with the United States Treasury Department to practice before the IRS, governed by rules stipulated in United States Treasury Circular 230. As a Federally Authorized Tax Practitioner and a tax appeals specialist my Enrolled Agent License #85353 is issued by the United States Treasury. With this license I work for U.S. taxpayers everywhere to resolve tax matters and de-escalate stress about taxes or tax disputes for individuals and corporations with federal and state issues.

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