Tax Prep & Planning

The Basics on The Foreign Earned Income Exclusion

Did you know not everyone who pays U.S. taxes lives and/or works on American soil? If this sounds like your scenario, you may qualify for the foreign earned income exclusion.

What is the Foreign Earned Income Exlusion?

This tax law allows you to exclude all or part of their foreign-source wages and self-employment income from U.S. federal income tax.

How do you qualify?

You must work and have a tax home outside the U.S. to qualify and meet either the bona fide resident or physical presence test.

Bona Fide Resident Test

If you establish a bona fide residence in the foreign country for an uninterrupted period that includes an entire tax year, which is January 1 through December 31. (It must include at least one full calendar year.)

The Physical Presence Test

If you reside for at least 330 full days in any consecutive 12-month period. A “full day” is 24 hours, so the days of arrival in and departure from a foreign country don’t count toward the physical presence test.

If you pass either of these tests, you’re eligible to exclude up to $105,900 in foreign earned income in the 2019 tax year.

What Earned Income Does This Exclusion Apply To?

The exclusion applies to earned income resulting from performing services as an employee or as an independent contractor.

Earned income =

  • Salaries
  • Self-employment income from personal services
  • Wages
  • Professional fees

How does the Foreign Earned Income Exclusion Affect Tax?

You must pay tax at the rate that would have applied had you not claimed the exclusion.

You can subtract the tax as calculated on just the amount of foreign earned income that is excluded. The result is your federal income tax liability amount.

Maximum Exclusion

The amount of foreign wages and salary that a taxpayer can exclude each year is limited to actual foreign source earned income or the annual maximum dollar limit, whichever is less.

Get Help!

Sound confusing? For more information on the foreign income tax exclusion and to speak directly with a tax professional, find your tax advisor match.

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