US $106k Foreign Earned Income Exclusion

[jim King]

I lived for ten years in Japan some time back and claimed FEIE while earning income there. Their tax system doesn't hit too hard until you are over the $100,000 level so my ex-pat status served me well with the FEIE.
There was a year, however, that I was called by the Dept. of Internal Revenue to prove you ex-pat status. As was mentioned you need to spend a certain amount of time outside the US in order to claim a FEIE. Not sure what that duration is currently, but the Internal Revenue Service may call you on the carpet to prove your time abroad. The way you show this time is with your passport which has date stamps.

[Larry Florida]

Originally Posted by NPCampbell

One side benefit of the current pandemic is that companies now realize that remote working is viable. My job looks like it will go 100% remote so I am researching the income tax implications of working outside the US.

The FEIE seems like a massive tax break. I paid a nominal income tax rate of 27% on my AGI and the FEIE excludes $106,000 of income for 2019. This seems like it could be a $29k tax break? Or am I missing something?

How tough is it to get the FEI exclusion if you are voluntarily working overseas and not the result of a company transfer?

What if my residence is on a boat and not a permanent residence?

What locales are advantageous? Bahamas, VI, etc? How tough is it to get a work permit/residence in these countries?

Will you be getting a domestic W2? This will likely squash the whole plan. Depending on the state you are from you may have to pay state tax also, most likely will have to.

Also the rental income is domestic income. I believe the exclusion is a foreign earned income exclusion. Domestic rental income is not earned income so it fails on two points. You will have to file a state return on the rental properties either way.

You can easily check but I think the cutoff is 330 days outside the USA.

Taxes are a nightmare of keeping records, especially state taxes. This was motivational in my move from NJ to Florida. You would be wise to establish residency in a no income tax state as a first step if you are not already in one.

If you can organize yourself as a corporation or 1099 you can get about 50k deferral via a solo 401k, double if married. Not an exclusion like the 106k but less risk tax wise.

I blazed this tax trail 8 years ago. Was well worth it. Also do your own taxes, its worth learning.

[OS2Dude]

Originally Posted by AndrewA2

Unless your primary residence is overseas (and you have the required local visa's/residence etc to allow for that) your income will be US based. ie your company will direct deposit into your US bank account, therefore not applicable for FEIE (as i understand it)

And then, once you are resident in another country, you will need to pay THEIR tax requirements on your income

That is incorrect as I understand it. My brother worked in Brazil for 18 months and did not pay income tax in the US. Nor did he pay income tax in Brazil. His permanent residence was still in the US, the company was a US company. He did have to leave Brazil for a week every few months or so to show he had not immigrated there. But note he was LIVING & WORKING out of the US.

[JD-Odyssey]

I am a US citizen currently working and residing in Bermuda since 2017. My foreign based income is not taxed to an amount roughly equal to $105k. I am only allowed to return to the US for 35 days per any given year... however, that is not necessarily a calendar year but can be any "sliding" year. I am self-employed so I am required to pay self-employment tax each year. I keep flight records in the event of being audited and usually limit my time in the states to around 30 days to be on the safe side. I maintain a bank account on the island so I'm required to file an FBAR each year. My employer directly transfers my earnings into that account. I use the account for a lot of my local expenses like rent and utilities which is very easy to do with online transfers. I wire transfer a fixed amount each month to my bank in the US. I would highly recommend you work with an accounting firm called Tax Samaritan (link below). They have done my taxes for the past two years and are great people who are very knowledgeable. I would also mention that I'm currently 70 and was retired when I took on this gig. Medicare doesn't cover you outside the US and many US based healthcare plans don't either. So, I would advise you to look into expat healthcare plans as well if you aren't covered.

https://www.taxsamaritan.com/best-on...tax-samaritan/

[NPCampbell]

Originally Posted by Larry Florida

Will you be getting a domestic W2? This will likely squash the whole plan. Depending on the state you are from you may have to pay state tax also, most likely will have to.

I currently live in Texas and that is where my rental property is. They don't have a state income tax so hopefully this won't be an issue.

Originally Posted by Larry Florida

Also the rental income is domestic income. I believe the exclusion is a foreign earned income exclusion. Domestic rental income is not earned income so it fails on two points. You will have to file a state return on the rental properties either way.

I assumed that unearned income would fall outside of the exclusion.

Originally Posted by Larry Florida

If you can organize yourself as a corporation or 1099 you can get about 50k deferral via a solo 401k, double if married. Not an exclusion like the 106k but less risk tax wise.

I already contribute the max "employee" contribution of 19+6 to my current 401k. That leaves only the employer portion which is capped at 25% of gross due to IRS rules. I guess 25% is better than nothing. The bigger savings would be from transferring my IRA into the solo 401k. Then I could backdoor Roth a full $6k without the pro-rata rule kicking in plus the 25%.

[NPCampbell]

Originally Posted by JD-Odyssey

I am a US citizen currently working and residing in Bermuda since 2017. My foreign based income is not taxed to an amount roughly equal to $105k. I am only allowed to return to the US for 35 days per any given year... however, that is not necessarily a calendar year but can be any "sliding" year. I am self-employed so I am required to pay self-employment tax each year. I keep flight records in the event of being audited and usually limit my time in the states to around 30 days to be on the safe side. I maintain a bank account on the island so I'm required to file an FBAR each year. My employer directly transfers my earnings into that account. I use the account for a lot of my local expenses like rent and utilities which is very easy to do with online transfers. I wire transfer a fixed amount each month to my bank in the US. I would highly recommend you work with an accounting firm called Tax Samaritan (link below). They have done my taxes for the past two years and are great people who are very knowledgeable. I would also mention that I'm currently 70 and was retired when I took on this gig. Medicare doesn't cover you outside the US and many US based healthcare plans don't either. So, I would advise you to look into expat healthcare plans as well if you aren't covered.

https://www.taxsamaritan.com/best-on...tax-samaritan/

Are you doing remote work or does your company have a presence in the Bahamas?

Also, if you are doing remote work, did you have to get a Bahamian long term work visa? Bahamian permanent residency?

Do you have to pay the 9.8% Bahamian national insurance?

[JD-Odyssey]

I'm located in Bermuda and not the Bahamas. I am not required to pay any local tax or national insurance here. My employer had to obtain a work permit for me to work in Bermuda. It took a while to obtain it. I had to show that I had a skillset that could not be found on the island. The reason for my employment was to train a Bermudian. I mapped out a multi-year apprenticeship program for my employer which they submitted to immigration as justification for a multi-year work permit.

While I reside in Bermuda, I am not considered a resident of Bermuda by the government. I would have to marry a Bermudian to become a resident (which I don't think my wife in the states would appreciate).

I also have investment properties in the states as well as income from IRAs and pensions. May tax prep is not easy and I had been using the same accountant for over 35 years prior to this venture. My prior accountant had never worked with foreign based income and recommended I find another firm that was more knowledgeable. It was a bit gut wrenching to leave someone I had worked with for so long but I'm very pleased with Tax Samaritan.

[NPCampbell]

Originally Posted by JD-Odyssey

I'm located in Bermuda and not the Bahamas. I am not required to pay any local tax or national insurance here. My employer had to obtain a work permit for me to work in Bermuda. It took a while to obtain it. I had to show that I had a skillset that could not be found on the island. The reason for my employment was to train a Bermudian. I mapped out a multi-year apprenticeship program for my employer which they submitted to immigration as justification for a multi-year work permit.

While I reside in Bermuda, I am not considered a resident of Bermuda by the government. I would have to marry a Bermudian to become a resident (which I don't think my wife in the states would appreciate).

I also have investment properties in the states as well as income from IRAs and pensions. May tax prep is not easy and I had been using the same accountant for over 35 years prior to this venture. My prior accountant had never worked with foreign based income and recommended I find another firm that was more knowledgeable. It was a bit gut wrenching to leave someone I had worked with for so long but I'm very pleased with Tax Samaritan.

I misread your location but it seems like all the questions still applied. Thanks!

[Boat Guy]

This certainly seems complicated...or at least many opinions in this group.


I'm not certain why they have this rule as it leads to some crazy structures. I can understand if you're taxed in a foreign country, not being double taxed, but it would make sense to tie it to that so there is no net gain nor loss...

[letsgetsailing3]

Originally Posted by Boat Guy

This certainly seems complicated...or at least many opinions in this group.


I'm not certain why they have this rule as it leads to some crazy structures. I can understand if you're taxed in a foreign country, not being double taxed, but it would make sense to tie it to that so there is no net gain nor loss...

You DO have a choice. You have the option of paying that country's taxes (generally higher), and not paying U.S. taxes on that income. You can have an accountant figure it both ways. I think you have to be consistent though, so once you decide, I think you have to stick with it.

[NPCampbell]

Originally Posted by Boat Guy

This certainly seems complicated...or at least many opinions in this group.


I'm not certain why they have this rule as it leads to some crazy structures. I can understand if you're taxed in a foreign country, not being double taxed, but it would make sense to tie it to that so there is no net gain nor loss...

The no net gain method is called the Foreign Tax Credit. However, you can only use it for things that you would be taxed on in the US, namely income. If you were subject to a foreign property tax or VAT taxes you can't deduct it. That's where the FEIE comes in. You can choose between the two methods but not both.

Personally, my take on it is, if you aren't living in the US then you aren't consuming any of the resources that your taxes typically go towards, roads, education, etc. Your tax burden should probably be lower anyways. Hell, we ought to go 100% "fee for service" for everything and eliminate the slush fund accounting that causes debt problems for every country.

[Discovery 15797]

Originally Posted by NPCampbell

The no net gain method is called the Foreign Tax Credit. However, you can only use it for things that you would be taxed on in the US, namely income. If you were subject to a foreign property tax or VAT taxes you can't deduct it. That's where the FEIE comes in. You can choose between the two methods but not both.

Personally, my take on it is, if you aren't living in the US then you aren't consuming any of the resources that your taxes typically go towards, roads, education, etc. Your tax burden should probably be lower anyways. Hell, we ought to go 100% "fee for service" for everything and eliminate the slush fund accounting that causes debt problems for every country.

I think there is a really important point you are overlooking...

You state that you are an employee of a multi-national company. Let's say that company is Acme Corp, and Acme Corp has subsidiary offices in Japan and Germany. Just because you go to Germany to work remotely from your alpine cabin in the Bavarian Alps does not make you an employee of Acme Corp, Germany. You are still an employee of Acme Corp, USA and so your income is not foreign earned.


Foreign earned income is not based on your physical location, it is based on your employer. (Unless of course you are self employed, in which case you would need a work permit/visa to work in a foreign country.)

Also, thanks to FATCA in 2010 there is no hiding foreign bank accounts, actual foreign earned income, or other assets from the IRS without significant penalty.

[NPCampbell]

Originally Posted by Discovery 15797

I think there is a really important point you are overlooking...

You state that you are an employee of a multi-national company. Let's say that company is Acme Corp, and Acme Corp has subsidiary offices in Japan and Germany. Just because you go to Germany to work remotely from your alpine cabin in the Bavarian Alps does not make you an employee of Acme Corp, Germany. You are still an employee of Acme Corp, USA and so your income is not foreign earned.

If you are an American citizen working in Germany you will pay German taxes and the income is considered foreign regardless of the nationality of the company you work for. Almost every country requires a work permit to work any extended amount of time. This does not remove the requirement to file and pay US taxes every year. The tax arrangement is different for every country and is determined by tax treaties between the US and every other country.

Originally Posted by Discovery 15797

Also, thanks to FATCA in 2010 there is no hiding foreign bank accounts, actual foreign earned income, or other assets from the IRS without significant penalty.

No one is trying to hide anything. Tax evasion is a crime. Using documented legal exclusions is not. Like all other exclusions, if you don't operate within IRS guidelines they can disallow the exclusion. I am trying to find out what those guidelines are.

[osprey877]

As I understand it, If you are a citizen of the USA, you are required to file a US tax return annually, regardless of where you live or of what country you are a resident. You have to declare and pay US taxes on your worldwide income, but if you are not a resident of the US for tax purposes, regardless of where you actually live, then you get a credit for any foreign tax paid.

If you renounce your citizenship and are not resident in the US, then you only pay US tax on your US source income.

In either event, if you earn income in a foreign jurisdiction, you will have to file a return and pay applicable taxes in that jurisdiction and if you become a resident of another country (all countries other than the US base their taxation rules on residency, not citizenship), you will have to file a return with the country that you are resident in, and pay their taxes, if any, on your worldwide income, including the US source income, subject to any credits you are given for the US tax paid.

As others have noted, tax residency is a complicated issue as is the applicability of the various tax treaties and federal/national exemptions and you should obtain expert accounting and legal advice prior to burning any bridges.

[Dockhead]

Tons of wrong information here.

I suggest going straight to the horse's mouth to clear up these misunderstandings:

https://www.irs.gov/individuals/inte...-earned-income

AND GET PROFESSIONAL HELP!

Contrary to what some have written here, it matters not whether you are paid from the U.S., even paid from a U.S. company into a U.S. bank account. The "source" of the income is derived from where you performed the services for which you are getting paid:

"Where or how you are paid has no effect on the source of the income. For example, income you receive for work done in France is income from a foreign source even if the income is paid directly to your bank account in the United States and your employer is in New York City." -- IRS

Contrary to what some have written here, you do not necessarily have to be out of the U.S. for all but 35 days -- there are two ALTERNATIVE tests you have to fulfill. EITHER physical presence abroad of more than 300 days OR bona fide residence in a foreign country.

"For this purpose, foreign earned income is income you receive for services you perform in a foreign country in a period during which your tax home is in a foreign country and you meet either the bona fide residence test or the physical presence test." -- IRS, op. cit.


Contrary to what some have written, having a "tax home" outside of the U.S. doesn't necessarily mean you are paying taxes in another country. You may even be an "itinerant" -- applicable to many of us. See:


https://expattaxprofessionals.com/bl...digital-nomads