This article was first published on May 7, 2012. It was updated on June 17, 2013, with information relevant to the 2012 and 2013 tax years.
How the Foreign Earned Income Exclusion Can Reduce or Eliminate Your US Expat Taxes
As a US expatriate living abroad and filing your expatriate tax return, you must make sure that you take full advantage of Form 1116 and Form 2555 . These forms are used to apply the Foreign Tax Credit Form and the Foreign Earned Income Exclusion Form. The Foreign Earned Income Exclusion basically excludes a big chunk of your foreign earned income from your US expat taxes. You may know that even as a US expat, all of the income that you make outside of the country is subject to identical tax rates to someone who is working and living inside of the US. That is where Form 2555 comes in. With this exclusion, you can exclude up to $95,100 of income that you have earned abroad on your 2012 tax return, and for the 2013 tax year you can exclude up to $97,600. While including potential deductions of housing and living expenses, it is possible to counterbalance most if not all of your tax liability in a given calendar year.
This short video explains a few fundamentals about the Foreign Earned Income Exclusion and how it can help reduce the amount of taxes you owe while living overseas.
Are You An Expat?
You might be eligible to exclude up to $95,100 or $97,600 of your foreign earned income… Let us show you how!
Time for US Expat Tax Class on the Foreign Earned Income Exclusion
The Foreign Earned Income Exclusion allows qualified expatriates to exclude up to $95,100 (2012) or $97,600 (2013) of their foreign earned income from US taxation. This allows many expats to reduce or even eliminate their US tax obligation by attaching one simple form!
How do I qualify?
In order to qualify:
- You must have foreign earned income
- Your tax home must be in a foreign country
- You must have done one of the following:
- Passed the Bona Fide Resident Test: Must be a US citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year with no intention of leaving that foreign country in the near future, or
- Passed the Physical Presence Test: Must have been a US citizen or a US resident alien who is physically present in a foreign country or countries for at least 330 full, 24-hour days during any period of 12 consecutive months.
Are There Limitations?
Your income must be foreign earned! It does not matter if it is paid to you in US dollars and deposited in a US bank, or paid in Euros and deposited in a bank account in Italy – you must have physically earned this income in a foreign country in order for it to be eligible for the exclusion.
If you also earn income from a US source that took place inside the United States, the US-sourced income cannot be excluded – but your foreign income is still eligible.
How do I claim the Foreign Earned Income Exclusion?
You can claim the Foreign Earned Income Exclusion by attaching Form 2555 to your Form 1040 when you file your US expat taxes with the IRS. Remember, you can only exclude your income earned in a foreign country.
What if I didn’t know about this and previously paid taxes on foreign income in prior years?
It’s not too late!
If you did not claim the Foreign Earned Income Exclusion in previous years and overpaid on your taxes, you can amend your returns to exclude this income. The statute of limitations is three years, get those tax dollars back while there is still time!
Don’t worry! Greenback can help you:
- Learn more by reading Expatriate Tax Return Savings Tips on our website.
- File amended tax returns and forms accurately and in a timely manner.
- Help you find the best ways to reduce or eliminate the taxes you owe by completing your US expat taxes for the current year.
More Information About US Expat Taxes
We have a number of posts on the Foreign Earned Income Exclusion; go here for our most comprehensive in regards to your US expat taxes. If you have any further questions, or if you would like to learn about our expat tax services, please contact us.