The Foreign Earned Income Exclusion (FEIE) is a provision in the U.S. tax code that allows American expatriates to exclude a certain amount of their foreign-earned income from U.S. taxable income. This exclusion aims to prevent double taxation on the same income by both the United States and the foreign country where the income is earned.
Eligibility Criteria
To qualify for the Foreign Earned Income Exclusion, taxpayers must meet either the Bona Fide Residence Test or the Physical Presence Test:
Bona Fide Residence Test
A U.S. citizen or resident alien who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year.
Physical Presence Test
A U.S. citizen or resident alien who is physically present in a foreign country or countries for at least 330 full days during any 12-month period.
Eligible Income
The exclusion applies strictly to earned income, such as wages, salaries, and professional fees. Passive income, such as dividends, interest, and capital gains, does not qualify for the exclusion.
Calculation and Limits
As of 2023, the maximum amount of foreign-earned income that can be excluded is $112,000. This amount is adjusted annually for inflation. It is essential to consider that any housing benefits and the foreign housing exclusion or deduction may also influence the calculation.
KaTeX Formula for Earned Income Exclusion:
- $ \text{FEIE}_{\text{max}} = $112,000 \times \frac{\text{Qualifying Days}}{365} $
Examples
- Example 1: A U.S. citizen working in France for an entire tax year earning $120,000 can exclude up to $112,000 from U.S. taxable income.
- Example 2: A U.S. resident alien working in Japan for 340 days earns $90,000. All $90,000 can potentially be excluded from U.S. taxable income under FEIE.
Historical Context
The Foreign Earned Income Exclusion originated in the early 20th century as a means to encourage American businesses to send employees abroad without facing double taxation. Over time, various amendments have been made to update the exclusion limits and qualifying criteria.
Applicability
The FEIE is beneficial for American expatriates and their employers by reducing the tax burden and promoting international business expansion.
Comparisons
The FEIE can be compared to the Foreign Tax Credit (FTC), which offers a dollar-for-dollar credit against U.S. taxes owed for foreign taxes paid. Expats can use either but not both on the same income.
Related Terms
- Foreign Tax Credit (FTC): A credit for taxes paid to a foreign government.
- Double Taxation: The levying of tax by two or more jurisdictions on the same income.
- Expatriate (Expat): An individual temporarily or permanently residing in a country other than their native country.
FAQs
Q1: Can I exclude both earned and unearned income under the FEIE? A1: No, the exclusion applies only to earned income, such as wages and salaries.
Q2: Do I need to file a U.S. tax return if I qualify for the FEIE? A2: Yes, you must file a U.S. tax return to claim the exclusion.
Q3: Can I claim both the FEIE and the Foreign Tax Credit? A3: You can claim both, but not on the same income. Strategic planning may be required to optimize benefits.
References
- Internal Revenue Service. “Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad.” IRS.gov
- U.S. Department of State. “Taxes for American Citizens Abroad.” State.gov
Summary
The Foreign Earned Income Exclusion provides significant tax relief for American expatriates by allowing them to exclude income earned and taxed abroad from their U.S. taxable income. Understanding the eligibility criteria, calculation methods, and strategic use alongside other tax credits can lead to significant tax savings and compliance.
