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
- 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.
- 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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