There are many ways individuals and businesses earn income, and one of the most commonly ways they get it wrong is when they earn income overseas. All United States citizens and resident aliens of the U.S. who live abroad are taxed on their worldwide income. As a general rule, all income should be included in your tax preparation, but there are very specific rules regarding foreign earned income, which we will share below.
What is Foreign Earned Income?
The IRS defines foreign earned income as “income you receive for services you perform in a foreign country during a period your tax home is in a foreign country and during which you meet either the bona fide residence test or the physical presence test.”
This includes income earned overseas such as an hourly wage, a yearly salary, a contract payment, and any other professional fees. There is also “noncash” income that counts towards foreign earned income including provided facilities, lodgings, meals, rental car, petty cash, etc. However, anything you earn through dividends, interest, pensions, capital gains, gambling, alimony, annuities, or social security benefits are considered unearned income.
How Can I Get The Foreign Earned Income Exclusion?
The Foreign Earned Income Exclusion allows individuals in certain circumstances to avoid paying taxes on their overseas income. A few ways this can happen are:
- Individuals can qualify to exclude income of foreign earnings up to a certain point that is adjusted annually for inflation
- $91,500 for 2010
- $92,900 for 2011
- $95,100 for 2012
- $97,600 for 2013
- $99,200 for 2014
- $100,800 for 2015
- Individuals can claim an exclusion or deduction from their income for the housing amount if the taxed home is located in a foreign country and the tax payer qualifies for the physical presence test or the bona fide residence test.
- Individuals may also be entitled to exclude income tied to the value of meals and lodging provided to them by an employer if they meet the criteria laid out in “Exclusion of Meals and Lodging” found in “Publication 54: Tax Guide for U.S. Citizens and Resident Aliens Abroad.”
- Individuals can also qualify for a prorated income exclusion if they attempted to meet all the time requirements but left the country because of some form of civil unrest.
- Individuals who work for the United States Federal Government who are assigned to perform work overseas and are paid through a U.S. agency that is reimbursed by the foreign government do not fall under the category of foreign earned income, given their income is technically from the U.S. Government.
Where Are Individuals Most Likely to Work Overseas
According to the State Department, over 6.3 million non-military Americans lived in over 160 countries during 2011. The estimated figures by global region were:
- Western Hemisphere: 2,591,000
- Europe: 1,612,000
- Near East: 870,000
- East Asia and Pacific: 864,000
- South Central Asia: 212,000
- Africa: 171,000
Tax Preparation and Foreign Earned Income
If you are a United States citizen or resident alien living abroad and you have earned income, it is essential to have a professional assist you in tax preparation, especially if this is your first year earning income overseas. It’s important to know what to claim, what to deduct, and most of all, what falls under the Foreign Earned Income Exclusions to ensure you get the best return.
Tax Preparation and Foreign Earned Income Forms
If you’d like to see for yourself how difficult filing for the Foreign Earned Income Exclusion can be, have a look at the forms the IRS hands out. A few of the most common are:
- Form 2350, Application for Extension of Time to File U.S. Income Tax Return (filing for an extension and qualifying for it doesn’t mean you don’t have to pay taxes)
- Form 2555-EZ, Foreign Earned Income Exclusion (sometimes the best option, sometimes not)
- Form 2555, Foreign Earned Income
- Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return (same as 2350)
- Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad (comprehensive, yet long guide)
Tax Preparation in Houston
And if you are in need of foreign earned income tax preparation services in Houston or the surrounding area, please contact me.