The foreign-earned-income exclusion allows individuals who earn money outside of the United States to avoid paying taxes on a portion of that income. They have the option to use this exclusion or the foreign tax credit, which is a tax credit that reduces the amount of taxes owed rather than reducing income. Other tax credits are available for individuals who care for children or disabled family members, as well as for low-income workers with children. The foreign tax credit is particularly significant as it prevents individuals from being taxed twice on income earned in other countries.
The Foreign-Earned-Income Exclusion is a provision in the Internal Revenue Code that allows nonresident taxpayers to exclude a limited amount of income earned outside the United States from being taxed. This means that if you make money while living and working abroad, you may not have to pay taxes on a portion of that income. For instance, if you are a U.S. citizen working in Japan and earn $100,000 in a year, you might be able to exclude up to $107,600 of that income from being taxed by the U.S. in 2020. This exclusion amount is adjusted annually to account for inflation. It’s important to note that you must choose between the Foreign-Earned-Income Exclusion and the Foreign Tax Credit, which is another method to reduce your U.S. tax liability on foreign income. You cannot claim both. Overall, the Foreign-Earned-Income Exclusion is intended to assist U.S. citizens and residents who work abroad in avoiding double taxation and lowering their overall tax burden.
The Foreign-Earned-Income Exclusion is a provision in the U.S. tax code that allows eligible taxpayers to exclude a certain amount of their foreign earned income from their taxable income.
To be eligible for the Foreign-Earned-Income Exclusion, you must meet either the Physical Presence Test or the Bona Fide Residence Test. The Physical Presence Test requires you to be physically present in a foreign country for at least 330 full days in a 12-month period, while the Bona Fide Residence Test requires you to establish a bona fide residence in a foreign country.
For the tax year 2021, the maximum amount of foreign earned income that can be excluded is $108,700 per qualifying individual. This amount is adjusted annually for inflation.
Yes, you can claim the Foreign-Earned-Income Exclusion if you meet the eligibility criteria, regardless of whether you work for a U.S. or foreign company.
Yes, even if you qualify for the Foreign-Earned-Income Exclusion, you are still required to file a tax return with the IRS. However, you may not owe any taxes if your foreign earned income is below the exclusion limit.
No, the Foreign-Earned-Income Exclusion is specifically designed for U.S. citizens or resident aliens who live and work abroad.
No, income earned by U.S. citizens working for the U.S. government overseas is not eligible for the Foreign-Earned-Income Exclusion. However, other tax benefits may be available in such cases.
Yes, self-employed individuals can claim the Foreign-Earned-Income Exclusion as long as they meet the eligibility criteria.
Yes, as long as you meet the eligibility criteria, you can claim the Foreign-Earned-Income Exclusion regardless of your spouse’s citizenship.
No, the Foreign-Earned-Income Exclusion only applies to earned income, such as wages, salaries, or self-employment income. Investment income, such as dividends or capital gains, is not eligible for the exclusion.
This site contains general legal information but does not constitute professional legal advice for your particular situation. Persuing this glossary does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.
This glossary post was last updated: 17th April 2024.
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