Tag Archive for Foreign Earned Income Exclusion

Application of Foreign Earned Income Exclusion to Civilian Contractors Working In Combat Zones – Part I

This blog addresses the foreign earned income exclusion rules as they apply to civilian contractors, and other civilian employees, who work in foreign country combat zones. By “civilian,” I am specifically referring to individuals who are not employees of the United States or any agency of the United States.

I. IRC Section 911 Foreign Earned Income Exclusion

Let’s start with some basics. IRC section 911(a)(1) allows a “qualified individual” to exclude his foreign earned income and housing costs from gross income. In the same way that the foreign tax credit limitation limits the foreign tax credit to the amount of U.S. tax attributable to foreign-source income, IRC section 911(b)(2)(D) limits the amount of foreign earned income that may be excluded to an amount adjusted annually for inflation. Read More

Written by | Posted in Individual • International

Foreign Earned Income Exclusion: What Is “Earned Income”?

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

Written by | Posted in Corporate • Expatriate • Income Tax • Individual • International • IRS

Foreign Housing Exclusion –IRS Announces Housing Cost Limits for Tax Year 2013

House and moneyOverview

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).

Calculation Rules

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

Written by | Posted in Europe, Middle East • Expatriate • International • IRS • North America • Real Estate • State And Local Tax (SALT) • Tax Policy

Foreign Earned Income Exclusion

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.

Written by | Posted in TaxConnections
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