Every year, millions of Americans work and earn income abroad. Some travel back and forth in between assignments while others choose to make a permanent move. Regardless of where you live or work, all U.S. citizens must pay taxes on foreign income.
Did you know that the Foreign Earned Income Exclusion or FEIE may be able to reduce a large portion of your taxable income? For 2019, the first $105,900 of your foreign income can be excluded from U.S. taxes. If you have foreign income, it is important that you understand how to qualify and file for the FEIE.
How do I qualify for the Foreign Earned Income Exclusion?
To claim the FEIE, you must pass all of Qualification 1 and one of two tests from Qualification 2. Below is a brief explanation of each, including updates from the new tax code.
Qualification 1: The Tax Home and Abode Test
Your tax home is where you work, and your tax abode is where you spend most of your time and money outside of work. Both your tax home and abode must be in a foreign country to pass this test.
Say you work overseas but return to the U.S. after each job is complete. The IRS will count your tax home as foreign (because you work there) but may consider your abode to be in the U.S. since you spend most of your non-work time there. Now, if you were to rent out your home and make a temporary move abroad, the IRS may determine your abode to be foreign. This would allow you to pass the first test, because both your tax home and abode are outside the U.S.
As you can see, the tax abode portion of this test can be tricky to figure out. That is where our team of experts can provide you with some clarity.
Recent changes to the tax code now allow contractors supporting the U.S. Armed Forces in combat zones to automatically pass this test. One of our clients is a military contractor who passed this test even though he lives in the U.S. in between assignments.
Qualification 2: The Bona Fide Residence Test or Physical Presence Test
To meet the second qualification, you must pass at least one of two tests. To pass the Bona Fide Residence test, you must qualify as a resident of a foreign country for at least one year. The Physical Presence Test requires that you be physically present in a foreign country for 330 days in any 12 month period. That leaves you with 35 days to travel to the U.S. or elsewhere.
For more information, Americans Abroad Inc. is a non-profit organization that provides helpful resources for Americans working abroad and breaks down these two test in detail.
What tax form should I file?
To claim the FEIE, you must complete Form 2555 and attach it to your final tax return. Part I asks for general employer information and II-III will help you determine which tests you pass. There are also opportunities to deduct work related expenses.
Final Thoughts
The Foreign Earned Income Exclusion can significantly reduce the amount you pay in taxes if you work abroad. Don’t beat yourself up if you have already filed your 2018 tax return – it’s not too late to amend it and seek advice. If you feel like you may qualify for this exclusion, speak to one of our advisors today about reviewing your 2018 tax return or planning for 2019.
