Many people dream of living and working abroad. Some are attracted to the ex-pat life in an island paradise, while others want to live out of a suitcase, moving from exotic locale to exciting destination.
Living and working abroad has its advantages from a tax standpoint. While everyone’s situation is different and there is no substitute for seeking the counsel of a Maryland tax attorney, it is useful to become familiar with the foreign earned income tax exclusion (FEIE) in general terms and to think about how you could take advantage of it while living your wanderlust dream.
FEIE in a Nutshell
As a general rule, US citizens are subject to federal income tax on their worldwide income. However, those who qualify for the foreign earned income tax exclusion (FEIE) can exclude over $100,000 of earned income from their taxable income. In some circumstances, however, such as if you’re an independent 1099 contractor, you are still going to have to pay the so-called self-employment tax. In other words you will have to pay Social Security and Medicare taxes.
The “earned” part of this provision means that the money must come from working. You can’t claim the exclusion for passive income streams like dividends or interest.
How do you qualify for the FEIE
First, in order to qualify for the FEIE, you have to establish what is referred to as a tax home abroad. This can be in a single country or in several countries.
In order to do this, you will need to cut ties with your US residence and document things like the sale of the car you owned in the US or that you got rid of you apartment lease.
Second, you must either be able to show either that you are a bona fide residence of a non-US country or that you can pass the physical presence test, showing you live overseas, even if you haven’t chosen a single location to hang your hat.
To qualify under the bona fide residence test, you should try to show that you have:
· Entered into a lease or bought a home in a foreign country
· Become a part of the social framework of your new community
· Document that you really are living in your new home and community
· Show that you are paying local taxes and that you have a local bank account, a driver’s license, etc.
To qualify under the physical presence test , you don’t have to establish a residency in a single location. This is for the “have laptop will work and travel” crowd. You do need to be able to show that you have been physically present in another country for 330 full days over the course of a 12-month period.
The physical presence test is all about the math. Stay overseas for the requisite number of days and you pass the physical presence test
Seek Advice From a Tax Counsel
There are other tax issues to understand when you are living and working abroad, both from the perspective of the IRS and the country or countries where you are living and working. It is a good idea to contact a Maryland tax attorney who is familiar with both US and international tax issues.