All About Foreign Earned Income Exclusion (FEIE) For U.S. Expats

What Is Foreign Earned Income Exclusion (FEIE)?

Is an exemption created by the IRS that allows Expats to not be taxed on the first $110,000 of income, but this income earned in the foreign country must come from a company or employer who is paying to the Social Security Administration in that foreign country. That is the basic requirement, any other type of income coming from consulting, royalties, dividends is not covered by FEIE. It must come from payroll earned in the foreign country paid by the company and them paying to Social Security in the foreign country.

How Do You Qualify For FEIE?

You qualify if you are an employee in a foreign country and the company is contributing to that country’s social security administration. There is no other criteria.

What Qualifies As Foreign Earned Income?

Only salary received from a company, there isn’t any other consideration but salary or payroll.

What Is Considered Foreign Income For Tax Purposes?

Is any type of income that any US Expats or any US Citizen or Resident living abroad earns from any other source outside US territory and this could be income from consulting jobs, dividends and royalties. Even if this is company in a foreign country that is accumulating profits are not being distributed, the US Citizen is obligated to account or include the profits as income even if there are no distributions. In the US there is a requirement for worldwide earned income it means that any income that you earn outside US is taxable.

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How Can Double Taxation Be Avoided On Foreign Income?

There are treaties between the US and different countries like Mexico, France, Spain, UK and the objective of this treaties is to avoid double taxation it means that if you have income in that foreign country and you pay taxes there, then that income will not be taxable again in the US. This only applies to income not related to payroll.

Another way is the foreign earned tax credit, it means that even when there is no treaty the IRS allows you to claim taxes paid in a foreign country when you report the income in the US, you have to report this in form 1116.

Do I Have To Pay Tax On Money Transferred From Overseas?

No you don’t have to pay taxes because usually you send money overseas when your income is already taxed. Now, remember that you have to file your tax return in the US and in the country you reside when you are a US Expat and there you pay taxes. The relevant thing is to file the tax return and pay the taxes with tax return in the US and also in the foreign country.

How Much Money In Gifts Is Tax Free?

According to the Internal Revenue Code every single US Expat and resident can give money up to $14,000 to any person, there is an exemption for the wife. For the spouse, there is an unlimited gift tax exemption, you can give any amount you want. After $14,000, if you’re not spouse, there is no gift tax even though they gift up to $11 million dollars. Because there is the State Tax Exemption and the US Gift Tax exemption, they work hand in hand, you can use one when you gift up to $11 million dollars and pay no taxes, because once the $14,000 limit is exhausted it kicks the next exemption for the $11 million dollars. So any US Expats or Residents can give $14,000 and no taxes will be paid and above that up to $11 million dollars there is the State Tax Exemption and there is no tax payable, what does happen is that when you gift money or property during your lifetime and the person dies there is already an amount of state tax exemption used.

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How Does Foreign Earned Income Exclusion Work?

Is an amount fixed that the IRS provides every year, so far is close to $10,00o you have to prove that you work for a foreign company in foreign country and you pay taxes in the foreign country and are an employee of the foreign country and you have to provide information of the company, the address, the tax ID and how much money pays you. In form 2555 you have to report, this form will allow you to provide information for the cap of the $110,000, this is a credit that is not refundable, it doesn’t mean that they are going to pay you for any amount it only means that the amount will be deductible from your tax return, it will not be taxed. If you have less than $110,000 income earned in the foreign country it doesn’t matter, you will only be allowed to exclude the amount that you earn from that foreign company in a foreign country that pays taxes in that country.

Can You Take Both Foreign Income Exclusion And Foreign Tax Credit?

No, you can’t, the foreign tax credit is only for the income that is not exempt, once I take the foreign income exclusion the IRS is forgiven me $110,000 as the income is forgiven meaning not taxable, I can not claim the tax that I paid in the foreign country for that income. That would be double dipping. I can only claim the amount that does not match to the amount of $110,000 of foreign earned income exclusion.

What Housing Expenses Are Excluded From Income?

Rent but have to prove in the form 2555 the residence address and the amount of expenses that you have in a yearly basis. Housing expenses include only rent or mortgage and repairs, it doesn’t include any home association or insurance.

Do I Have To Claim Foreign Income Exclusion?

It is only if you are a employee in a foreign country that pay taxes to the Social Security administration in that country. That is the only way you are able to claim foreign income exclusion and it only applies to income earned as a salary any other income is taxable at the highest rate.

Readers should note that this article is only intended to convey general information on these issues and that FAS CPA & Consultants (FAS) in no way intends for the contents of this article to be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. This article cannot serve as a substitute for such professional services or advice. Any decision or action that may affect the reader’s business should not rely solely on the contents of this article, but should rather be consulted on with a qualified professional adviser. FAS shall not be responsible for any loss sustained by any person who relies on this presentation. This article is subject to change at any time and for any reason.

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