Taking the Foreign Earned Income Exclusion in 2019

Every week or so during tax season, I receive an email from an American citizen living abroad that goes something like this: “I was told I didn’t have to file US taxes while living in [Thailand]. I don’t make much money. Should I file? Am I in trouble?”

Some folks think it’s a matter of not making too much money: “I only make $30,000 USD a year, and my husband is not a U.S. citizen – do I really have to file my taxes with the IRS?”

The truth is, unless you make below the filing threshold (which is under $12,200 in 2019 for a single person) you are probably required to file in your country of residence and with the U.S. However, you will not be taxed twice. The U.S. tax code allows for taxpayers to exclude up to a certain amount of foreign-earned income that is taxed in their country of residence. This is known as filing a Foreign Earned Income Exclusion, or FEIE. First, you file your tax return in your country of residence, and then file with the United States through the IRS.

What exactly is the Foreign Earned Income Exclusion (FEIE)?

If a U.S. taxpayer lives and works abroad in a foreign country for a substantial period of time during the year, he may choose to exclude up to $105,900 of his foreign-earned income from his U.S. income tax obligations. Usually, this means that the taxpayer will pay income taxes to the foreign country of residence on that amount. The foreign income exclusion is limited to the amount actually earned in a foreign country plus housing allowance.

Who can take the Foreign Earned Income Exclusion?

In order to take the exclusion, a taxpayer must pass the tax home test and the bona fide residence test or physical presence test. A tax home, according to the IRS, is “a regular or principal place of business, employment, or post of duty, regardless of where you maintain your family residence. If you don’t have a regular or principal place of business because of the nature of your trade or business, your tax home is your regular place of abode.”

A bona fide residence means that a taxpayer lived in foreign country as a bona fide resident for an uninterrupted tax year. This is different than having merely satisfied the physical presence test of 330 days of presence in a foreign country or countries. A person may live in a foreign country for 330 days without establishing a residence. However, either test will satisfy the requirement to take the FEIE.

Any citizen who works abroad in support of the U.S. Armed Forces in a combat zone may also qualify for the FEIE. Even if that citizen has an abode in the U.S., they are considered to have a foreign tax home for purposes of taking the FEIE. Taxpayers in this category include contractors and employees of contractors. These taxpayers must still satisfy the physical presence test, but they may maintain an abode in the U.S. and still qualify for the exclusion.

Missionaries, ex-pats, and other taxpayers who have relocated to foreign countries (not U.S. territories or possessions) may qualify for the exclusion.

Who cannot take the Foreign Earned Income Exclusion?

Federal employees and members of the U.S. military cannot take the FEIE. Also, any citizen of the United States who lives and works in Cuba may not take the exclusion. (Taxpayers performing services at U.S. Naval base at Guantanamo Bay may still qualify, however.)

What can a taxpayer do if he intended to stay the full year, but had to leave due to civil unrest?

The IRS publishes a list each year of countries and the dates that they qualify for exceptions to the physical presence test rules.

How does a taxpayer claim the Foreign Earned Income Exclusion?

Taxpayers must complete form 2555 and attach it to their 1040, filing by April 15 of the tax year. (Foreign-residing taxpayers receive a two month extension). Once a taxpayer has claimed the FEIE for the tax year, he can not claim any other deductions or credits towards foreign earned income or foreign taxes paid. Taxpayers claiming FEIE cannot claim the Additional Child Tax Credit or the Earned Income Tax Credit. Also, keep in mind that filing form 2555 means that you cannot e-file your tax return. It must be paper filed, which takes a bit longer to process with the IRS.

Does taking the Foreign Earned Income Exclusion affect paying Self-Employment Taxes?

Taxpayers who are self-employed will still be required to pay social security and Medicare taxes on all earned income and housing allowance[4]. Read here how how to avoid double taxation on social security taxes.

What if I need professional help with my tax return?

Not every tax preparer is qualified to assist you with the Foreign Earned Income Exclusion. In fact it is rare for stateside tax preparers to complete this form – some have never had experience with it. Because of the potential for tax penalties if the forms are not completed correctly, it is really important to interview your tax preparer for the job. We at Heritage Income Tax, Ltd have the training, expertise and experience to assist you with taking the FEIE, as well as other complex issues. Please email us at aubrey@heritagetrs.com for further assistance.

The author, Aubrey Corcoran, M.A. is the owner of Heritage Income Tax, Ltd. She is a graduate of the Income Tax School and a former high school science teacher. The views expressed in this paper are her own, and are not intended as a substitute for professional tax planning or legal advice.

Instructions for Form 2555 (2019). https://www.irs.gov/instructions/i2555

A list of combat zones, established by the President of the United States under executive order can be found at https://www.irs.gov/newsroom/combat-zones

Self-employment tax for businesses abroad. Retrieved January 25, 2020 from https://www.irs.gov/individuals/international-taxpayers/self-employment-tax-for-businesses-abroad