If you are a U.S. citizen or resident working abroad, you may be eligible for the Foreign Earned Income Exclusion (FEIE). The FEIE is a tax benefit that allows you to exclude a certain amount of foreign earned income from your U.S. taxable income. In this blog post, we will discuss everything you need to know about the Foreign Earned Income Exclusion.
What Is the Foreign Earned Income Exclusion?
The Foreign Earned Income Exclusion is a tax benefit that allows eligible taxpayers to exclude a certain amount of foreign earned income from their U.S. taxable income. For the tax year 2021, the maximum amount of foreign earned income that can be excluded is $108,700.
To be eligible for the FEIE, you must meet one of the two tests:
- The Physical Presence Test: You must be physically present in a foreign country or countries for at least 330 full days during a 12-month period.
- The Bona Fide Residence Test: You must be a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year.
It’s essential to note that you cannot use both tests in the same tax year.
How to Claim the Foreign Earned Income Exclusion
To claim the Foreign Earned Income Exclusion, you need to complete Form 2555 and attach it to your tax return. The form requires you to provide information about your foreign income and your eligibility for the FEIE based on one of the two tests mentioned above.
If you are claiming the FEIE for the first time, you may also need to attach supporting documents, such as proof of foreign residency or physical presence, to your tax return.
Benefits of the Foreign Earned Income Exclusion
The Foreign Earned Income Exclusion can be beneficial for taxpayers working abroad as it allows them to reduce their U.S. tax liability. The exclusion can also provide additional benefits such as:
- Lowering your Adjusted Gross Income (AGI): By excluding foreign earned income from your U.S. taxable income, you can lower your AGI, which can help you qualify for other tax benefits, such as the Child Tax Credit or the Earned Income Tax Credit.
- Lowering State Tax Liability: Some states allow you to exclude foreign earned income from state tax liability as well.
- Avoiding Double Taxation: The FEIE can help you avoid double taxation by reducing your U.S. tax liability on foreign earned income that has already been taxed by a foreign government.
Conclusion
The Foreign Earned Income Exclusion can be a valuable tax benefit for U.S. citizens and residents working abroad. To claim the FEIE, taxpayers must meet one of the two tests and complete Form 2555. By taking advantage of the FEIE, taxpayers can reduce their U.S. tax liability and potentially qualify for other tax benefits.