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.

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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