When you imagine life as an expat, you probably aren’t thinking about the not-so-fun aspects, like taxes. Instead, you’re likely imagining the freedom and adventure that you’ll be afforded as an expatriate, experiencing a new culture. The reality is, though, taxes are a fact of life – but they don’t have to be a burden. In fact, there are some pretty outstanding tax deductions and exclusions that apply to expats – including the Foreign Earned Income Exclusion (FEIE).
What Is The Foreign Earned Income Exclusion (FEIE)?
The Foreign Earned Income Exclusion allows qualified expats to exclude the first $100,800 of foreign wages from their 2015 US expat tax return. This is a popular tax break for temporary and permanent expats alike. There are several ways to qualify, depending on your current situation.
The first, and likely preferred, method for those who may be temporary expats is the Physical Presence Test. This test requires that you live abroad for 330 out of 365 days – and it does not have to be a calendar year.
The second test is the Bona Fide Residence Test, which requires that you first live outside the US for a full calendar year. Additionally, you must prove that you do not intend to return to the US to live for the foreseeable future and that you’ve established your residence in the host country. This test is a bit more subjective, as it is based on intent.
It is important to note that the FEIE applies only to earned income; if you have dividends, interest or capital gains, they are excluded from being claimed on the FEIE.
Having A Home In The US
If you’re like many expats, you may still have a home in the US. What you do with this home and how you classify it can make a difference in the types of tax benefits you will get as an expat. Generally speaking, the government classifies your ‘tax home’ where you primarily live and work. Your ‘abode’ is determined by where you manage your personal, family and economic ties. Where your family is can certainly play a role in determining your ‘abode,’ but if you show that you’ve established a residence in your host country by integrating into society, having a home and setting up a bank account, among other factors – your ‘abode’ could be your host country. As far as your physical home back in the States, you could rent it out, let family live in it or even leave it vacant. You’ll want to keep accurate records of your home in your host country, also, since that can go a long way in helping prove you are integrated into the foreign society.
Foreign Housing Exclusion
While we’re on the subject of housing, it’s a good idea to discuss the Foreign Housing Exclusion. You can use this exclusion in addition to the FEIE, increasing the FEIE by the amount of your qualified housing expenses. There are two different ways this is calculated:
- If you’re a salaried wage earner, you may qualify for the Foreign Housing Exclusion.
- If you are self-employed, you may qualify for a deduction.
The exclusion or deduction amount depends on the country in which you reside – there is a calculation you can follow to figure this out. It will look like this:
Housing Expense Limitation – Base Housing Cost = Maximum Housing Exclusion
Note that if you live in a city with a higher cost of living, you may be able to exclude an even higher amount from your US expat taxes. In terms of expenses allowed, you can use rent, utilities (except TV and internet), insurance, property taxes and furniture rental.
As a US expat, the Foreign Earned Income Exclusion and other tax exclusions/deductions are great tools for reducing your tax liability. It’s always a good idea to understand these benefits and discuss any questions with an expat tax professional in order to save big on your US expat taxes!
Need More Information About The Foreign Earned Income Exclusion?
Talk to one of our dedicated expat CPAs or IRS Enrolled Agents today – we’re here to help you with all your tax needs!