One of the main ways expats can reduce their tax bill is by using the Foreign Earned Income Exclusion (FEIE). This money-saving deduction is an absolute lifesaver for many expats, lowering if not altogether eliminating their tax liability. Get the Foreign Earned Income Exclusion info you need for 2019 and 2020 so you know what to expect on tax day.
Foreign Earned Income Exclusion 2019 & 2020 Updates
Each year, the IRS adjusts the maximum amount of the FEIE to account for inflation. For the 2019 tax year, the limit is $105,900. The Foreign Earned Income Exclusion 2020 maximum amount has risen to $107,600. That means that the first $107,600 of your foreign earned income can be excluded from taxation.
One important note: some income does not qualify for the FEIE. The IRS lists the following types of income as not covered by the FEIE:
- Pay received as an employee of the US government or a related agency
- Pay for work in international waters
- Pay in specific combat zones
- Payments received after the end of the tax year in the subsequent year that services were performed
- The value of meals and lodging that are excluded from income because it was furnished for the convenience of the employer
- Pension or annuity payments, including benefits such like social security
Qualifying for the Foreign Earned Income Exclusion
In order to use the exclusion, you must qualify either by using the bona fide residence or physical presence test. To use the bona fide residence test, you’ll need to have been in another country for the full calendar year. To use the physical presence test, you need to have been in the country for 330 days in a consecutive 12-month period, but you get to pick which 12-month period. Even if you are unable to qualify using the physical presence test, other creative options for qualifying for the FEIE may be available to you, depending on your individual situation.
Also, if you qualify using either the physical presence or bona fide residence test, you may also be able to use the foreign housing deduction to limit your tax liability even more! The foreign housing exclusion allows you to exclude qualified housing expenses like rent, utilities, or repairs from taxation.
How to Claim the Foreign Earned Income Exclusion
If you qualify for the FEIE, in order to use it, you’ll need to complete Form 2555 or Form 2555-EZ. Form 2555 is the standard form, but Form 2555-EZ is only for expats who are not planning to use the foreign housing deduction in conjunction with the FEIE. Once you’ve completed the form, just attach it to your Federal Tax Return, and you’re set!
Avoid the Last-Minute Tax Rush, and Become Compliant Today
Greenback accountants are known for how simple they make the expat tax filing process. Get started with Greenback today, and you can rest assured that your taxes are correct and that you’ve used every exclusion and deduction available.