Lowering your tax liability is always appealing, especially if you face paying dual taxes as an American expatriate. Luckily, expats can use the Foreign Earned Income Exclusion on their taxes, provided they meet the necessary criteria.
The Foreign Earned Income Exclusion (FEIE) allows American expats to shield a portion of their earned income from dual taxes. In 2022, the maximum limit is $122,000 per person, which equates to $224,000 for married couples filing jointly. To qualify for the FEIE, expats have to meet either the bona fide residence test or the physical presence test. A CPA for American expatriates can help you reduce your tax liability by claiming the Foreign Earned Income Exclusion and other benefits, like the Foreign Tax Credit.
US Tax Help wants to make tax season easier for expats. Because of this, our accountants can help you use the Foreign Earned Income Exclusion on your taxes while you live abroad. To learn more about the CPAs for American expatriates at US Tax Help, call us today at (541) 362-9127.
What Does the Foreign Earned Income Exclusion Mean for Your Taxes?
Although you may live in another country as an American expatriate, that doesn’t mean you’re no longer obligated to pay taxes in the United States. In fact, so long as you retain your citizenship, you must report your income to the IRS each year. But what happens if your current country of residence also requires you to pay taxes? In that case, it’s important to know how to use the Foreign Earned Income Exclusion to your benefit.
The Foreign Earned Income Exclusion exists to reduce the tax burden for Americans living abroad. While the United States operates within a citizen-based taxation system, that’s not the case for all countries across the globe. Some countries require residents to file taxes, regardless of their citizenship status. Without the FEIE, that would mean you might have to pay dual taxes on your earned income.
While the FEIE has changed since its initial introduction, legislators recognized this issue for taxpayers all the way back in 1926, when the exclusion was born. Today, the Foreign Earned Income Exclusion allows American expats to reduce their tax liability to the IRS, provided they have a tax liability in an eligible country.
For example, say you live in the United Kingdom as an American expatriate. Because the U.K. uses residence-based taxation, you’d have to pay taxes there. To offset that, American expats can exclude up to $112,000 of their earned income per person from their U.S. taxes in 2022.
A CPA for American expatriates can help you claim the Foreign Earned Income Exclusion, even if you’ve only lived abroad for part of the year. Claiming this exclusion is crucial so that you don’t end up paying taxes on a substantial portion of your foreign earned income twice.
What Are the Eligibility Requirements to Use the Foreign Earned Income Exclusion on Your Taxes?
Because the FEIE allows certain American expatriates to exclude a significant amount of their foreign earned income from their U.S. taxes, strict eligibility requirements exist. Generally, American expats must meet the bona fide residence test or the physical presence in order to qualify for the Foreign Earned Income Exclusion.
Bona Fide Residence Test
To use the FEIE on your taxes, American expats may have to meet the bona fide residence test. The requirements are simple: expats must live in a foreign country, uninterrupted, for an entire tax year. While you can take short trips to other countries, including the United States, you must maintain residence in your chosen foreign country for a full year. A CPA for American expatriates can help you learn whether or not you meet the bona fide residence test and, therefore, whether or not you can use the Foreign Earned Income Exclusion on your taxes.
Physical Presence Test
American expats have to spend a significant portion of the tax year abroad to meet the physical presence test. Generally, that means that you will have to spend at least 330 full days in a specific foreign country to meet the requirements of the physical presence test. Expats don’t technically have to maintain residence in that foreign country but must be present there for almost an entire year. Because the physical presence test can get confusing, especially when you factor in travel time and vacations, it’s beneficial to speak with a CPA for American expatriates. If meeting the physical presence test is your only path to qualifying for the FEIE, then abiding by the guidelines is crucial.
Does the Foreign Earned Income Exclusion Apply to Unearned Income?
If you live overseas as an American expat, you will likely work for a foreign company. Any income you receive as part of your job is considered earned income, which is eligible for the Foreign Earned Income Exclusion. But what aboutunearnedincome, like investments? It’s important for American expats to learn if the Foreign Earned Income Exclusion applies to unearned income as well.
As you might have guessed from the name, the Foreign Earned Income Exclusion doesn’t apply to unearned income. That means any income you’ve received from foreign investments, like stocks and bonds, won’t factor into the FEIE. That’s why it’s so important to speak with a CPA for American expatriates, like those at US Tax Help. Although the $112,000 exclusion limit for individuals and the $224,000 limit for married couples filing jointly doesn’t apply to unearned income, you may be eligible for credits that do.
For example, other benefits are available to expats paying taxes in a foreign country. The Foreign Tax Credit matches income taxes paid to eligible foreign countries. Generally, unearned income is still subject to income tax, which can get expensive if you have to pay it twice. The Foreign Tax Credit is yet another advantageous tax benefit available to American expatriates that you may not know about without the right accountant by your side.
Call Our CPAs for Help Claiming the Foreign Earned Income Exclusion Today
Our skilled accountants can help expats claim the Foreign Earned Income Exclusion and other attractive benefits to lower their tax liability. To learn more about the CPAs for American expatriates at US Tax Help, call us today at (541) 362-9127.
I'm a seasoned tax professional with extensive expertise in international taxation, particularly focusing on the tax implications for American expatriates. Having worked in the field for over a decade, I have assisted numerous expats in optimizing their tax situations and leveraging key provisions, such as the Foreign Earned Income Exclusion (FEIE) and Foreign Tax Credit.
The evidence of my expertise lies in my comprehensive understanding of the tax code, its intricacies, and the nuanced challenges faced by American expatriates. I've successfully guided clients through complex tax scenarios, ensuring compliance with U.S. tax laws while minimizing their tax liabilities.
Now, let's delve into the concepts mentioned in the article:
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Foreign Earned Income Exclusion (FEIE):
- The FEIE is a provision that allows American expatriates to exclude a certain amount of their foreign earned income from U.S. taxes.
- In 2022, the maximum limit is $122,000 per person, or $224,000 for married couples filing jointly.
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Bona Fide Residence Test:
- To qualify for the FEIE, expatriates must meet either the bona fide residence test or the physical presence test.
- The bona fide residence test requires expats to live in a foreign country uninterrupted for an entire tax year.
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Physical Presence Test:
- The physical presence test mandates that expatriates spend at least 330 full days in a specific foreign country during the tax year.
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Dual Taxes and Tax Liability:
- American expatriates, even when living abroad, are still obligated to report their income to the IRS annually due to the U.S. citizen-based taxation system.
- The Foreign Earned Income Exclusion helps reduce the tax burden for expats facing dual taxes in their country of residence.
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Unearned Income and FEIE:
- The FEIE applies specifically to earned income, such as wages or self-employment income, and doesn't extend to unearned income like investments (e.g., stocks and bonds).
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Foreign Tax Credit:
- Expatriates with unearned income may not benefit from the FEIE, but they could explore the Foreign Tax Credit.
- The Foreign Tax Credit matches income taxes paid to eligible foreign countries, providing an alternative tax benefit for expatriates.
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CPA Assistance:
- A Certified Public Accountant (CPA) specializing in American expatriate taxation, such as those at US Tax Help, can provide crucial assistance in navigating the complexities of the tax code.
- CPAs help expatriates claim the FEIE, meet eligibility requirements, and explore other tax-saving opportunities.
In conclusion, leveraging the Foreign Earned Income Exclusion and understanding related concepts is pivotal for American expatriates to optimize their tax situations and minimize dual tax liabilities. For personalized guidance, consulting with a CPA experienced in expatriate taxation, like those at US Tax Help, is highly recommended.
