Claim the Foreign Earned Income Exclusion
Published on April 18, 2018
Updated on August 01, 2024
by Sparsh Ganeriwala
Sparsh Ganeriwala, an IRS Enrolled Agent with over 12 years of expat tax experience, specializes in filing US taxes for Americans living in Canada, US/Foreign Trusts, and GILTI Tax.
Table of Contents
How do I know if I can claim the Foreign Earned Income Exclusion?
You can claim the Foreign Earned Income Exclusion (FEIE) if your tax home is in a foreign country and you have foreign-earned income, such as a salary from employment abroad.
Do I qualify for the Foreign Earned Income Exclusion?
To claim the benefits of the exclusion, you need to meet one of two tests:
- Physical Presence Test (PPT): This test requires you to be outside the United States for at least 330 full days in any 365-day period (366 days in a leap year).
- Bona Fide Residence (BFR) Test: You must live and work in a foreign country for an entire calendar year (from January 1 to December 31).
How much can I exclude under the Foreign Earned Income Exclusion?
For the tax year 2024, you can exclude up to $126,500 of your foreign earnings. This amount is adjusted annually for inflation. If you are married, your spouse can exclude up to $126,500 of foreign earnings too, provided they meet the requirements. Together, you and your spouse can exclude as much as $253,000.
Why use the IRS Streamlined Tax Amnesty Program?
It’s for American citizens that didn’t know they had to file US tax returns each year, and have therefore fallen behind. Some more than 30 years! With the IRS Streamlined Procedure, say goodbye to overdue tax returns, late fees, and penalties.
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What else can I use to deduct my expenses when living in another country?
You can use the Foreign Housing Exclusion (FHE), a tax provision designed to help US expats. It allows you to exclude or deduct part of your housing expenses from your gross income if your tax home is in a foreign country.
How is it calculated?
Let’s take a look at an example with Rachel, a US expat working in Nassau. She chooses an affordable apartment and keeps her expenses low. Her total housing costs for the year are $25,000, while the Foreign Housing Exclusion for Nassau is $49,700.
To calculate Rachel’s taxable income, we first subtract the base rate of $19,200 from the Nassau exclusion limit of $49,700, giving us a maximum claim of $30,500.
Then, we subtract Rachel’s actual expenses of $25,000 from this maximum claim. This leaves Rachel with a taxable income of $5,500 related to her housing.
You can take a look at our list of countries here.
What are the benefits of the Physical Presence Test?
The Physical Presence Test is beneficial for those who travel frequently or do not have a permanent residence abroad. It allows you to qualify based on the number of days you spend outside the United States, providing flexibility for various living arrangements.
What are the benefits of the Bona Fide Residence Test?
The Bona Fide Residence Test is advantageous for individuals who establish a permanent home in a foreign country. This test is based on your intent to remain in the foreign country and your actual length of stay, making it suitable for long-term expatriates.
How can I apply for the Foreign Earned Income Exclusion?
To apply for the FEIE, you must complete Form 2555 and attach it to your annual tax return, Form 1040 or 1040-X. This form helps the IRS determine if you meet the qualifications and calculate the amount you can exclude. It’s essential to keep accurate travel dates and foreign residency records to support your claim in the event of an audit or IRS investigation.
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