Who qualifies for the Foreign Earned Income Exclusion?

Foreign earned income means work performed abroad

Earned income generally includes wages, salaries and professional earnings for services performed in a foreign country during a qualifying period. The location of the work usually matters more than where the employer is based or where payment arrives. U.S. workdays are generally not foreign earned income. Interest, dividends, capital gains and pensions do not become eligible merely because they arise abroad. Compensation paid by the U.S. government to its employees is excluded from the qualifying foreign earned income definition.

Your tax home must be abroad

A tax home generally refers to your principal place of business or employment, not simply your family residence. You generally cannot have a foreign tax home for this purpose during a period when your abode remains in the United States. Abode considers family, personal and economic ties, not only a mailing address. Temporary overseas assignments and rotational work can raise difficult questions even when substantial time is spent abroad. Passing a day-count test alone does not establish the separate tax-home requirement.

Choose the test you actually satisfy

The physical presence test generally requires 330 full days in one or more foreign countries during a consecutive twelve-month period and is available to U.S. citizens and resident aliens. The bona fide residence test generally requires an uninterrupted foreign residence period that includes an entire tax year. It is available to U.S. citizens and, under the applicable rules, certain resident aliens who are citizens or nationals of countries with a qualifying U.S. income tax treaty. Bona fide residence depends on facts and intentions, not merely the number of days abroad.

An exclusion has limits and tradeoffs

The annual maximum is inflation-adjusted and may be prorated for a partial qualifying year. A separate foreign housing exclusion or deduction may be available under its own conditions. Income above the exclusion is not necessarily taxed as though excluded income never existed; the stacking rule affects the rate calculation. Foreign taxes allocated to excluded income cannot also support a foreign tax credit. The FEIE does not eliminate self-employment tax, and revoking an election can restrict re-election without IRS consent for later years.

Common mistakes

• Assuming 330 days outside the United States alone establishes eligibility.
• Trying to exclude foreign investment income or claim credits for taxes on excluded earnings.

Filing requirements

• Use Form 2555 to report the qualifying period and claim the exclusion election.
• Retain work-location, travel, tax-home and foreign income records supporting the claim.

Potential penalties

• An unsupported exclusion can result in additional income tax, interest and applicable penalties.

Related IRS forms

• Form 2555
• Form 1040
• Form 1116

What to consider next

• Identify where each service was performed and separate earned from investment income.
• Verify the foreign tax home and compare both qualifying tests.
• Ask Chirino USA to compare the FEIE with foreign tax credits before electing.