All US citizens are required to pay US taxes on their earned income. Thankfully, US expats have the opportunity to deduct a significant portion of their income with the FEIE. David McKeegan, Co-Founder of Greenback Expat Tax Services explains FEIE and how you can qualify for this valuable deduction. The video transcript includes updates to information relevant to the 2013 and 2014 tax years.
Hi everybody. I’m David McKeegan with Greenback Expat Tax Services and our question this week is, “What is the Foreign Earned Income Exclusion?” A good question; most expats will love the Foreign Earned Income Exclusion. Basically, the Foreign Earned Income Exclusion allows you to exclude some of your overseas earnings from US taxation. For the 2012 tax year, the amount you can exclude is $95,100 and for the 2013 tax year, it’s going up to $97,600. (This rises to $99,200 for the 2014 tax year)
Basically, the rules are that it has to be earned income. Things like interest, dividends, rental income won’t be excluded. It’s only earned income. This can be self-employment income. This can be working for an overseas corporation. This can be working for a US corporation while you live overseas. In order to qualify for the foreign earned income exclusion you need to either meet the Bona Fide Resident test or the Physical Presence test and we have other videos on both of those. We have lots of information on our blog about the Physical Presence test and the Bona Fide Resident test.
Basically, the Physical Presence test requires you to live inside a foreign country for 330 days in a 365-day period and the Bona Fide Resident test requires you to actually reside legally in a foreign country permanently with no intention of returning to the US. As part of the foreign earned income exclusion, you can deduct part of your foreign housing expenses. Again, we have a lot more detail about this in our blog. Depending on where you live in the world, this number can vary. It’s usually about a third of the foreign earned income exclusion but if you live somewhere like Tokyo, this number goes up to $128,000. This can be a pretty significant tax savings for you.
If you have more questions about Foreign Earned Income Exclusion, please have a look at our website, GreenbackTaxServices.com, or IRS publication 54 which goes into quite a bit of detail about this. Thank you very much.
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