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  • Writer's pictureLewis Grunfeld, CPA

What Is The Foreign Earned Income Exclusion in 2023 and Other FAQ

Updated: Jan 13

Over the years, we've been asked many questions by our clients in regard to the often confusing Foreign Earned Income Exclusion (FEIE). We though it would be helpful to compile the most frequently asked questions we receive along with comprehensive answers. We hope you fine it helpful.

What is the maximum foreign earned income exclusion amount?

The Foreign Earned Income Exclusion allows you to exclude a portion of your foreign income from U.S. taxation. The specific amount that you can exclude varies each year and is determined by the IRS. As of the 2023 tax year, the maximum exclusion amount is $120,000.

Is the foreign earned income exclusion available only to US citizens?

The eligibility for the Foreign Earned Income Exclusion (FEIE) is not limited to U.S. citizens alone. Both U.S. citizens and U.S. resident aliens can potentially qualify for the FEIE, provided they meet certain criteria.

How many days outside the US for foreign earned income exclusion?

To qualify for the Foreign Earned Income Exclusion (FEIE), one of the following two tests need to be met which have different rules as far as days outside the US.

  • The physical presence test: Under the physical presence test, you must be physically present in a foreign country for a minimum of 330 full days during any consecutive 12-month period. These 330 days don't have to be consecutive or within a single calendar year.

  • The bona fide residence test: The bona fide residence test focuses on establishing a genuine residency in a foreign country. It doesn't have a specific day requirement but considers factors such as the length and nature of your stay, your intentions, and your social and economic ties to the foreign country.

How do you pass the bona fide residence test?

To meet the requirements of the bona fide residence test and qualify for the Foreign Earned Income Exclusion (FEIE), it is important to establish a genuine residency in a foreign country. Here are some key considerations to help you pass the bona fide residence test:

  • Intent to establish residence: Show a sincere intention to make the foreign country your long-term or permanent home. This can include joining local organizations, establishing local bank accounts, obtaining local employment, and immersing yourself in the local community.

  • Length of stay: While there is no fixed duration, spending a significant amount of time in the foreign country is generally expected. However, you can leave the country for brief or temporary trips for vacation or business.

Remember that passing the bona fide residence test is based on the overall circumstances of your situation, and there is no specific checklist to follow.

What is not included in foreign earned income for the foreign earned income exclusion?

  • U.S. sourced income: Income earned from U.S. sources, such as wages or self-employment income while physically present in the United States, is not considered foreign earned income for the FEIE. Only income earned from foreign sources is eligible.

  • Passive income: Income from passive sources like interest, dividends, rental income, and capital gains generally does not qualify for the FEIE.

  • Pension or retirement income: Income from pensions, annuities, or retirement accounts, whether from the U.S. or foreign sources, is not included in the FEIE.

  • Compensation for services as a U.S. government employee: If you are an employee of the U.S. government, including the military, and receive compensation for services performed abroad, that income is not considered foreign earned income for the FEIE.

What is the benefit of foreign earned income exclusion?

The foreign earned income exclusion provides a significant benefit by allowing eligible individuals to exclude their foreign earned income from U.S. federal income tax. This means that qualifying income earned (up to the maximum limit) while living and working abroad is not subject to taxation by the United States.

What is the difference between the foreign tax credit and the foreign earned income exclusion?

With the FEIE, individuals can exclude a portion of their foreign earned income, such as wages and self-employment earnings, from U.S. taxes. On the other hand, the FTC allows individuals to offset their U.S. tax liability by claiming a credit for foreign taxes paid on different types of income. While the FEIE reduces taxable income, the FTC directly reduces the amount of tax owed. It's important to consider limitations and eligibility requirements when choosing between the two.

Can I take both Foreign Earned Income Exclusion and foreign tax credit?

Yes, it is possible to utilize both the Foreign Earned Income Exclusion and the foreign tax credit, but not for the same income. In practical terms, if your foreign earned income exceeds the FEIE limit, you can exclude the eligible amount using the FEIE and then claim the FTC for the remaining income. By taking advantage of both provisions, you can maximize your tax benefits and potentially reduce your overall tax liability.

How do you claim the foreign earned income exclusion?

To apply for the Foreign Earned Income Exclusion (FEIE), you need to complete Form 2555 along with your tax return. Form 2555 is specifically designed for reporting foreign earned income and calculating the exclusion amount.

How do I revoke foreign earned income exclusion?

To revoke the Foreign Earned Income Exclusion (FEIE), you need to prepare a written statement expressing your intent to revoke the exclusion. Include essential details such as your full name, Social Security number or taxpayer identification number, current address, and contact information.

Do I have to report foreign earned income?

Yes, you must report your foreign earned income to the IRS as a U.S. citizen. However, certain exclusions or deductions may help reduce your U.S. tax liability such as the Foreign Earned Income Exclusion (FEIE).

CPAs for Expats is here to guide you every step of the way

At CPAs for Expats, we specialize in helping US expats stay compliant with their US taxes. Our low fees and 4.9/5 rating on independent review platforms attests to our commitment to excellence and client satisfaction. Contact us today, and let our tax experts simplify your life and taxes.

Article by Lewis Grunfeld, CPA

Lewis Grunfeld, CPA, is a renowned expert in international and U.S. expat taxation, with expertise spanning over ten years. He has successfully helped thousands of expats around the world navigate complex international U.S. tax regulations, and achieve significant tax savings. His work is driven by a strongly rooted passion for assisting the expat community through a wide range of tax situations, ensuring tailored solutions for each unique situation.


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