The foreign earned income exclusion is a tax exclusion to help prevent US citizens and resident aliens from being subject to double taxation. In this article, we will go over the basics of what the foreign earned income exclusion covers.
Foreign Earned Income
First, it is important to understand what foreign income includes and what it does not include. The IRS defines foreign income as “wages, salaries, professional fees, or other amounts paid to you for personal services rendered by you.” However, foreign income does not include the following:
- Any pay you receive as a military or civil employee of the United States or one of its agencies.
- Pay you receive for services you conduct in international waters or airspace.
- Any payments that you do not receive until after the end of the tax year following the year during which the income was earned.
- Any pay that is excludable from income. This includes the value of meals and lodging your employer provides as a convenience.
- Pension or annuity payments.
Qualifying for the Foreign Earned Income Exclusion
You must meet certain requirements to qualify to claim the foreign earned income exclusion. First, your tax home must be in a foreign county. Second, you must be one of the following:
- A U.S. citizen who is a resident of a foreign country for an interrupted period that includes an entire tax year.
- A resident alien who is a citizen or national of a country that the United States has an income tax treaty with. You must have been a resident of a foreign county for an uninterrupted period that includes an entire tax year.
- A U.S. citizen or resident alien who is present in a foreign county for at least 320 days during any period of 12 consecutive months.
What You Can Exclude
If you qualify for the foreign earned income exclusion, you may wonder what you can exclude. In some instances, you may qualify to exclude foreign income up to $112,000 for the 2022 tax year. Additionally, you can deduct certain foreign housing expenses for that income. Some can also deduct the value of meals and lodging provided to you by your employer on their premises and for your convenience. These deductions help reduce how much of your foreign income is taxable in the United States.
There is a special provision if you have foreign earned self-employment income. You can exclude this amount from your taxable income. However, these amounts will still be subject to self-employment tax.
Utilizing the Foreign Earned Income Exclusion
If you think that you may qualify for utilizing the foreign earned income exclusion, meet with an experienced tax preparer who can help you take this exclusion properly.
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