Following the trend of the past several years, the Tax Court continues to review foreign earned income exclusion cases at a relatively high rate. In most of the recent cases, the Tax Court has denied the FEIE claims on a number of different grounds.
Tag Archive for FEIE
While the past year did not produce any monumental changes to U.S. tax law, there are a number of noteworthy changes that expats should keep in mind as we enter 2017. We also share a few highlights from President-elect Trump’s current tax plan.
We’ve blogged a number of times in the past about the foreign earned income exclusion (“FEIE”), because it is one of the main tax relief measures available to expats filing U.S. tax returns. Expats qualifying for the FEIE may be able to exclude all or part of their foreign salary or wages from their income when filing their return – so its importance can’t be overstated.
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.
Not many U.S. expatriates realize that the foreign earned income exclusion is an election and is not automatic. In a recent tax court Nancy McDonald learnt this in a painful way when her exclusion was denied. Nancy McDonald V. Commissioner TC Memo 2015-169.
IRC Section 911(a) provides that a qualified individual may elect to exclude from gross income the foreign earned income of such individual. To qualify for the foreign earned income exclusion (FEIE), the taxpayer must satisfy a three-part test:
1. Taxpayer must be a U.S. citizen who is a bona fide resident of a foreign country for an entire taxable year or physically present in a foreign country during at least 330 days out of a 12-month period, sec. 911(d)(1); Read more
Americans working abroad may be eligible to exclude certain foreign earned income (wages, compensation for services) from US taxable income under the rules governing the Foreign Earned Income Exclusion (FEIE). The FEIE amount is adjusted annually for inflation. This amount for 2014 is $99,200. If a couple is married, each spouse can claim the full FEIE amount (e.g., for 2014, each spouse can exclude up to $99,200 of his or her earned income). If one spouse does not earn enough salary to fully utilize the exemption amount and has “excess” FEIE, this excess cannot be used by the other spouse to exclude amounts beyond his or her own exemption.
The exclusion can apply regardless of whether any foreign tax is paid on the foreign earned income, provided certain tests are met. Generally, for an individual to qualify for the Read more
You are an American citizen living abroad and you have just found out, through one source and then another source that you are required to file US income taxes every year. Who knew? You may feel overcome with an angst and a fear that life abroad – once blissful and so secure – is about to change and change a lot.While it is true that, indeed, as an American citizen you do need to file taxes with the United States on your worldwide income each year, the fact that you have not been compliant is not as ominous as it may at first seem. One often hears horror stories, mostly hearsay, of how this American or another’s life had been opened up and read like a book by the IRS. The reality though is not so scary. The IRS realizes that many Americans living abroad did not know of their obligation to file their US taxes and are offering a safe and worry-free path forward … Read more
The tax season is upon us and as expats begin the arduous task of gathering documents for their US tax preparation, it seems like a good time to provide an overview of the 2013 tax changes that may impact expats. The most important impact may be saving money, so let’s take a closer look!
1) The Foreign Earned Income Exclusion (FEIE)
We love that the Foreign Earned Income Exclusion adjusts for inflation each year! Last year the FEIE was $95,100 and this year it jumps to $97,600. This means you deduct the first $97,600 you earn—you could eliminate your entire US tax liability with this credit alone. However, it’s important to remember that you must ‘qualify’ as an expat to be Read more
A foreign housing exclusion is available for certain overseas housing expenses that exceed a “base housing amount”. Generally, the allowable housing expenses are the reasonable expenses (such as rent, utilities other than telephone charges, and real and personal property insurance) paid or incurred during the year by the taxpayer, or on his behalf, for foreign housing. The housing costs include those of the spouse and dependents if they lived with the taxpayer. Allowable housing expenses do not include the cost of home purchase or other capital items, wages of domestic servants, or deductible interest and taxes. Some taxpayers mistakenly believe if they use only a portion of the employer-provided housing amount, they can still deduct the full amount permitted under the foreign housing exclusion rules. This is not so. To be eligible for exclusion, the taxpayer must actually incur these amounts in rental payments (for example, paid to the landlord on his behalf by the employer or paid by the taxpayer to the landlord from his employer-provided housing amount).
To be eligible for exclusion from tax, the allowable housing expenses must exceed a so-called “base housing amount”. The base housing amount is 16 % of the maximum Foreign Earned Income Exclusion amount (FEIE). For 2013, this “base housing amount” is US$15,616 (computed as follows: 16% x US$97,600 – the 2013 FEIE amount). Reasonable foreign housing expenses in excess of the ”base housing amount” are eligible for the exclusion, but such Read more
The foreign earned income exclusion needs an acronym or a nickname or something, because that is a mouthful and I am not aware of any common shortcuts. I guess I will try FEIE, but I admit that seems lame.
The FEIE is a spectacular way to pay less United States taxes if you are working in a foreign country. A U.S. Citizen is required to file a return and report their worldwide income, even if you are spending the whole year teaching kids in Haiti, or working for a tech company in Germany, or playing hockey in Russia. It doesn’t seem fair that you pay taxes to both the U.S. and the country where you are working, so there are two options available to reduce your U.S. tax liability.
The first option is the foreign tax credit; basically you get a credit for the taxes you paid to the foreign country on the income that is also being taxed by the U.S.. If the tax in Haiti is 10%, but the US tax is 25% then you end up paying the U.S. only 15%. If the tax in Germany is 25% and the U.S. tax is 25% then you won’t pay any U.S. tax; it would all be offset by the credit. Not a bad choice, but the FEIE is even better.
The FEIE allows you to exclude up to $95,100 of earned income from a foreign country (for 2012) if you meet the requirements. That would mean if you make $80K in Haiti you would pay the Haitian tax, but you would be able to pay 0% to the U.S. because the income would be excluded – no need for the foreign tax credit. Other than the requirement for it to be earned income, there is really only one big hurdle and there are two ways to clear it. You can either qualify as the bona fide residence test or the physical presence test. Bona fide residence means you have established a permanent residence in the foreign country. The physical presence test is, you guessed it, a counting of the days you were physically in a foreign country. Once you get to more than a year you can use the FEIE.
As with everything tax related, it’s much better to understand the tax consequences before you do something major like move to another country for a job. There can be some huge tax savings by meeting the requirements for the FEIE. It’s better to understand it before you head off for your foreign adventure.