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Expatriate Tax Preparation and Understanding Exclusion of Foreign Earned Income

externalization There is much confusion about what constitutes foreign earned income with respect to the residency location, the place that the work or services are performed, and the supply of the salary or fee payment. Foreign residency or long periods abroad of the tax payer is a qualification to prevent double taxation.

Moreover, foreign source income is for services performed outside the U.S. If a person resides abroad and is employed by a company abroad, services performed for your company (work) on a trip on business in the U.S. is recognized as U.S. source income, and isn't susceptible to exclusion or foreign tax credits. Additionally, passive income from the U.S. source, such as interest, dividends, & capital gains from U.S. securities, or U.S. property rental income, is also not susceptible to exclusion.

Conversely, earned income abroad, and passive income from foreign securities, rental, or any other activities abroad, can be excluded from U.S. taxable income, or foreign taxes paid thereon, bring credits against U.S. taxes due.

Basically, the IRS recognizes that income earned abroad is taxed through the resident country, and could be excluded from taxable income by the IRS when the proper forms are filed. The origin from the income salary paid for earned income doesn't have bearing on whether it's U.S. or foreign earned income, but rather where the work or services are carried out (as with the illustration of an employee employed by the U.S. subsidiary abroad, and receiving his pay check in the parent U.S. company out of the U.S.).

So, Who Qualifies for Exclusion?

Generally there are two methods of expatriates to be eligible for a exclusions of foreign earned income:

The most easy strategy is to file for a special form any time during the tax year for postponement of filing that current year until a complete tax year (usually calendar) has been completed in a foreign country as the taxpayers principle place of residency. This is typical because one transfers overseas in the center of a tax year. That year's taxes would simply be due in January following completion of the following twelve month abroad following the year of transfer.

The 2nd way is to become overseas any 330 days in each full 12 month period abroad. These periods can overlap in the event of an incomplete year. In this case the filing deadline follows the completion of each twelve month abroad.