In a previous blog post, we discussed some of the tax options available when a U.S. taxpayer goes overseas for employment. A popular option is to use the Foreign Earned Income Exclusion (FEIE). The FEIE is especially useful now that the Tax Cuts and Jobs Act (TCJA) makes other options, at least for the near future, no longer beneficial (see our blog post on the effects of the TCJA on reporting options). In this blog post, we will discuss the FEIE in more depth.
What is the FEIE?
If you are a U.S. citizen or a resident alien of the United States and you live abroad, you are taxed on your worldwide income the same as if you were living in the United States. You might also be taxed by the foreign country on the same income. However, you may qualify to exclude from income an amount of your foreign earnings, up to $104,100 for 2018. In addition, you may exclude or deduct certain foreign housing amounts. Alternatively, you might also be entitled to exclude from income the value of meals and lodging provided to you by your employer. You claim the FEIE by filing Form 2555 with your individual income tax return.
What are the benefits?
Take a simplified example of a professor who is assigned to teach in a foreign country. Her salary is $200,000, and she incurs $45,000 of qualified housing expenses in the foreign country. She has no other income or deductions and she qualifies for the FEIE. If she does not claim the FEIE, her federal taxes would be $46,000. If she excludes the full amount of income and housing expenses she is eligible to claim, her federal tax will be $20,500; a savings of $25,500.
Who is eligible?
To claim the FEIE and the foreign housing exclusion or deduction, you must meet all three of the following requirements:
- Your tax home must be in a foreign country.
- You must have foreign earned income.
- You must be one of the following:
- a U.S. citizen who is a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year,
- a U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect and who is a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year, or
- a U.S. citizen or a U.S. resident alien who is physically present in a foreign country for at least 330 full days during any period of 12 consecutive months.
We can help
Ensuring you meet the requirements can be complicated. How you determine your tax home to meet the qualifications is beyond the scope of this blog post; however, the International Tax Group at Sciarabba Walker has the knowledge and experience to guide you through the intricacies of qualifying for and claiming the FEIE. If you are on an overseas assignment or are expecting to be, contact us as soon as possible. We can help you come up with a strategic plan to maximize your tax savings when spending time abroad.
By Cliff Acheson, CPA