Understanding The Foreign Earned Income Tax Exclusion While Living Abroad

By: Kevin E. Thorn Legal 4 Followers

3 Votes

Living and working abroad may be appealing to many people and even has advantages from a tax standpoint. In fact, familarizing yourself with the foreign earned income tax exclusion (FEIE) can be helpful when living in another country.

FEIE Basics

In general, 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. However, if you’re an independent 1099 contractor, you are still going to have to pay the so-called self-employment tax, meaning 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.

Qualifying for the FEIE

First, in order to qualify for the FEIE, you must establish a tax home abroad. This can be in either one or multiple countries.

This means cutting ties with your US residence and documenting things you have gotten rid of such as selling your car you owned in the US or the termination of your local apartment lease.

Second, you must either be able to show that you are a bona fide residence of a non-US country or that you can pass the physical presence test, proving you live overseas, even if you haven’t chosen a set location to stay long-term.

To qualify under the bona fide residence test, you should show that you have:

·      A residence in a foreign country, by way of a lease or real estate purchase 

·      Integrated socially within the community

·      Provided documentation on your living arrangements in your new location

·     Proof that you pay local taxes, have a local bank account, a driver’s license, etc.

It is not mandatory to establish a residency in a single location in order to qualify under the physical presence test.  However, you do need to show that you’ve been physically present in another country for 330 full days over the course of a 12-month period.

The physical presence test ultimately requires staying overseas for the requisite number of days in which you pass the physical presence test

Seek Advice From a Tax Counsel

There are of course other tax issues related to living and working abroad, both from the perspective of the IRS and the country where you are living. This is why it is a good idea to contact an experienced tax attorney who is familiar with both US and international tax issues.

Author Bio

Kevin E. Thorn

Kevin E. Thorn is an experienced and sought after tax attorney focused on successfully representing your sensitive federal tax disputes, tax controversies and tax litigation problems.


3 Votes

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