Foreign Earned Income Exclusion is a useful tool for any U.S expat to use. As many know that the U.S. has a citizenship-based taxation system, so you could be paying U.S. taxes on income earned in a foreign country. Although, the U.S. has tax breaks that you can use to reduce your tax bill. The FEIE on form 2555 is beneficial to this aspect to U.S. expats.
Understanding the Foreign Earned Income Exclusion (FEIE)
It is essentially, a tax break that exempts amounts of overs seas income to U.S. taxation. This is why U.S expats can get taxed twice on their income, in the country where you are working/residing and the U.S.
What Is the Amount of Foreign Earned Income Exclusion?
The FEIE sum is indexed for inflation each year. The FEIE for 2021 is $108,700.
| Tax Year | Amount |
| 2021 (filed in 2022) | $108,700 |
| 2020 (filed in 2021) | $107,600 |
| 2019 (filed in 2020) | $105,900 |
| 2018 (filed in 2019) | $103,900 |
| 2017 (filed in 2018) | $102,100 |
How to Qualify for the Foreign Earned Income Exclusion (FEIE)
Eligibility from FEIE comes in two main forms, income from foreign and foreign housing. To qualify you must have foreign earned income and have a tax home in an overseas nation and meet criteria set by the IRS
- Be a U.S. citizen, is resident in a foreign country, for a tax year.
- Be physically, present for at least 330 full days in a foreign country within any 12 month period.
How to Qualify for the FEIE using the Physical Presence Test
One way as stated above is the physical presence test, to be eligible for FEIE. This stated:
- Earned income from a foreign country. Including salary, self employment earning, but excludes pension payments, dividends, interest and capital gains.
- Tax home, outside the U.S. You must not have, a tax home means that you have employment that is outside the U.S., and residency outside the U.S. with a job that will last at least a year.
- Be physically present in a foreign country. This as stated above is being 330 days in the country out of 365 days a year. This is not based on a calendar year but is adjusted over a two year period if required. These days must be complete as transit days do not apply. You must log evidence incase the IRS question you.
How to Qualify for the FEIE Using the Bona Fide Residence Test
An alternative way to qualify is through the Bona Fide residence test which includes the following.
- Foreign Earned Income – You must have income in a foreign country, to pass the test.
- Tax home in a foreign country – You must have a tax home that must last a year or longer. Where you must not be residence in the U.S.
- Bona Fide Resident – This means that you have been a residence of a foreign nation though out a tax year. Normally, needing intend to stay in the nation.
Not foreign earned income. The following amounts are not included in foreign earned income:
- Income earned as a military or civilian employee of the United States government or any of its organisations
- Compensation for services rendered in international seas or airspace (not a foreign country)
- Income earned after the end of the tax year succeeding the year in which the income-generating activities were executed
- Pay that is not generally taxable, such as the cost of food and accommodations provided for the comfort of your company on their grounds.
- Contributions from a pension or annuity, including social security benefits
