16 Jun Foreign Earned Income Exclusion (FEIE): Drill Down into IRS Form 2555
We get all sorts of fascinating questions from established US Taxpayers as well as those experiencing space beyond the USA for the first time.
It seems regardless of the degree of sophistication in US income tax filing obligations most people are out to lunch when it comes to arcane acronyms and filing requirements.
Complicating matters is the fact that there are distinct difference to consider between:
As well as between:
- Foreign Bank Account Reporting (FBAR) – FinCEN Form 114
- Foreign Financial Asset Reporting (FATCA) – Form 8938
Many US Taxpayers simply find the distinctions between these forms mind numbing, as they should. If you are still with me today’s post focuses on FEIE.
Foreign Earned Income Exclusion (FEIE)
Foreign Earned Income as per 26 CFR 1.911-3 is income received for services you perform in a foreign country. Your regular or main place of business, employment or post of duty must be in a foreign country(s), and you cannot have an abode in the United States during the same period.
To claim the foreign earned income exclusion, foreign housing exclusion, or foreign housing deduction, you must make a valid election on your tax return and you must:
- be a U.S. citizen or resident alien
- have foreign earned income
- have a foreign tax home
- meet either the Bona Fide Residence Test or the Physical Presence Test.
In other words to qualify you must have foreign earned income and meet the tax home test AND either the bona fide residence test or the physical presence test.
Top 10 Lessons Learned re FEIE:
- You must file a return even if you have no tax liability after claiming the exclusion.
- File Form 2555 with your U.S. Income Tax Return, Form 1040.
- If you are married both spouses may claim a foreign earned income exclusion as long as both spouses meet the requirements. A separate Form 2555 must be filed for each spouse.
- If you and your spouse lived in separate foreign households, you each can claim qualified expenses for your own household only if: your tax homes were not within a reasonable commuting distance of each other, and each spouse’s household was not within a reasonable commuting distance of the other spouse’s tax home. Otherwise, only one spouse can claim his or her housing exclusion or deduction. This is true even if you and your spouse file separate returns.
- You may be able to take a Foreign housing exclusion (if an employee) or Foreign housing deduction (if self-employed). Complete Part VI of Form 2555 to claim the foreign housing exclusion or deduction.
- You cannot claim the additional child tax credit if you claim either of the exclusions or the housing deduction.
- You cannot exclude or deduct more than your foreign earned income for the year.
- Excess exclusions can be carried over 1 tax year.
- An election exists to apply higher limits on housing expenses.
- For more information please refer to the instruction set for IRS Form 2555 keeping in mind that IRS instructions are NOT CONSIDERED SUBSTANTIAL AUTHORITY!
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