US $106k Foreign Earned Income Exclusion

[NPCampbell]

Originally Posted by wannago

I would expect most first world countries to have similar requirements for offering work visas. And some third world countries can be actually worse, have heard stories about people getting into trouble for working on there own house.

Some of the Caribbean countries are strict about giving local residents first dibs on available jobs there (like the Bahamas). However, places like Costa Rica, allow you to reside as a resident without a local job as long as you can prove a minimum foreign monthly income and meet net worth thresholds.

[Benfavorite]

Hi, I’m not an expert, but I have been working overseas for the past 5 years. When I file my tax return Turbo Tax will ask a series of questions to see if you qualify as a resident of a foreign country or if you qualify by a physical presence test. I qualify by physical presence due to my situation, but I have to remain outside of the US, it’s territories to include the airspace above for 330 days. I have to document my travel back to the former.....not really sure the would try to verify that unless you were audited, then not sure how the would verify that!

Having said all that, I’m in a fixed location, but I don’t think that would matter! Also, my paycheck is deposited to a US bank.

[away again]

Seriously...

Step 1. Ask you employer if itis possible for you to be posted overseas for this reason.

Step 2. Ask the peanut gallery

[Juggerknot]

Join a couple of the digital nomad groups on facebook, you'll not only get a lot of first hand knowledge, but also the groups are rife with international tax professionals that can steer you in the right direction. I've been working remotely and living outside the states for over a decade, you can, if structured properly, save on your tax burden.

[NPCampbell]

Originally Posted by Juggerknot

Join a couple of the digital nomad groups on facebook, you'll not only get a lot of first hand knowledge, but also the groups are rife with international tax professionals that can steer you in the right direction. I've been working remotely and living outside the states for over a decade, you can, if structured properly, save on your tax burden.

Since this post I've paid for a consultation with a tax expert that specializes in expat taxes. I'll pass on some of the interesting things I learned about this exclusion. Bear with me this is a lot of techno stuff.

1) The Foreign Earned Income Exclusion (FEIE) amount for 2019 was $105,900.

2) As some have mentioned in this post, the nature of the work that you perform while residing in a foreign country is immaterial to the FEIE exclusion. If you satisfy the Bona Fide Resident Test (BFRT) or the Physical Presence Test (PPT) then you are eligible for the exclusion.

3) Whether you pay foreign income tax or not is immaterial to the FEIE exclusion.

4) If you do pay foreign income tax, you can also claim the Foreign Tax Credit. However, you can't claim a credit for income that is also being deducted due to the FEIE.

5) You are eligible for the FEIE using the PPT if there is any 12 month contiguous period, ending at any point in the tax year, in which you spent 330 days outside of the US and international waters.

6) If you qualify for the FEIE using the PPT then you only receive a prorata percentage of the FEIE based on the number of actual days spent outside of the US and international waters for the tax year (not the eligibility period). For example, if I spent 340 days outside of the US in the tax year then I would only be able to claim 340/365 of the $105,900 exclusion. Note that if I pick an eligibility period of 12 months that does not coincide with the tax year, it's possible for the number of days spent outside of the US to be a number far less than 330 days and still be eligible for the FEIE. Your prorata deduction would just be considerably less.

7) The FEIE is a "below the line" deduction. What this means is that you do not get to deduct the $105,900 from the top end or the higher tax brackets of your income. It is deducted from the bottom end and lower tax brackets of your income. For example, if you are a single filer making $200,000. Your last dollars earned for the year would be in the 32% tax bracket. You don't get to deduct 32% of $105,900 from your taxes. The first $9700 of your income is only taxed at 10% so you can only deduct 10% of the first $9700 of the FEIE amount of $105,900. Income after that to $39475 is taxed at 12%. Therefore you can deduct 12% of the FEIE of $105,900 from $9701 to $39475 and so on. For all practical purposes, you calculate what your taxes would be for a single filer on the FEIE of $105,900 and deduct that from your taxes. It's pretty much a constant depending on what status you file as, single, married, head of household, etc.

8) The FEIE does not apply to payroll taxes. You must pay social security, disability, medicare, etc at the current rates.

9) You can't alternate years of taking the FEIE and not taking it. Once you start taking the FEIE you are assumed to continue taking it (as long as your pass the PPT or BFRT). Stopping and restarting the FEIE causes doubts as to whether you are truly working abroad and your future exclusions may be denied.

10) You may take the Foreign Housing Deduction/Exclusion (FHD) in addition to the FEIE. What is the FHD? All amounts paid for rent or lease, insurance, repairs, marina fees, mooring fees, utilities, etc may be deducted (not a credit) within a min/max range determined by the IRS. What is that range? The minimum FHD amount 16% of the $105,900 ($16944) and the max is 30% ($31770 but is adjusted upwards for high cost of living countries).

For example, let's say I have mortgage payments on my boat. I can't deduct my payments with the FHD because I am not renting or leasing. I can still deduct any mortgage interest I have just like I would with a home. Additionally, let's say I also paid $35000 in insurance, repairs, mooring fees, utilities, etc . Since $35000 is over the max of $31770 I would be able to deduct up to the max $31770, less the min, $16944 for a total deduction $14756 in addition to the FEIE. However, if I was in the Bahamas, the IRS adjusts the max deduction from $31770 to $49700 because the Bahamas is a high cost of living area. Therefore, my deduction would be $35000 less $16944 for a total deduction of $18056.

11) I don't believe that you can create a business entity that owns your boat and make payments to the entity to claim the FHD as this would violate the "arms length" rule with the IRS. I am sure this is possible though if you are using an owner/operator model and chartering, etc.

[Dockhead]

Originally Posted by NPCampbell

Since this post I've paid for a consultation with a tax expert that specializes in expat taxes. I'll pass on some of the interesting things I learned about this exclusion. Bear with me this is a lot of techno stuff.

1) The Foreign Earned Income Exclusion (FEIE) amount for 2019 was $105,900.

2) As some have mentioned in this post, the nature of the work that you perform while residing in a foreign country is immaterial to the FEIE exclusion. If you satisfy the Bona Fide Resident Test (BFRT) or the Physical Presence Test (PPT) then you are eligible for the exclusion.

3) Whether you pay foreign income tax or not is immaterial to the FEIE exclusion.

4) If you do pay foreign income tax, you can also claim the Foreign Tax Credit. However, you can't claim a credit for income that is also being deducted due to the FEIE.

5) You are eligible for the FEIE using the PPT if there is any 12 month contiguous period, ending at any point in the tax year, in which you spent 330 days outside of the US and international waters.

6) If you qualify for the FEIE using the PPT then you only receive a prorata percentage of the FEIE based on the number of actual days spent outside of the US and international waters for the tax year (not the eligibility period). For example, if I spent 340 days outside of the US in the tax year then I would only be able to claim 340/365 of the $105,900 exclusion. Note that if I pick an eligibility period of 12 months that does not coincide with the tax year, it's possible for the number of days spent outside of the US to be a number far less than 330 days and still be eligible for the FEIE. Your prorata deduction would just be considerably less.

7) The FEIE is a "below the line" deduction. What this means is that you do not get to deduct the $105,900 from the top end or the higher tax brackets of your income. It is deducted from the bottom end and lower tax brackets of your income. For example, if you are a single filer making $200,000. Your last dollars earned for the year would be in the 32% tax bracket. You don't get to deduct 32% of $105,900 from your taxes. The first $9700 of your income is only taxed at 10% so you can only deduct 10% of the first $9700 of the FEIE amount of $105,900. Income after that to $39475 is taxed at 12%. Therefore you can deduct 12% of the FEIE of $105,900 from $9701 to $39475 and so on. For all practical purposes, you calculate what your taxes would be for a single filer on the FEIE of $105,900 and deduct that from your taxes. It's pretty much a constant depending on what status you file as, single, married, head of household, etc.

8) The FEIE does not apply to payroll taxes. You must pay social security, disability, medicare, etc at the current rates.

9) You can't alternate years of taking the FEIE and not taking it. Once you start taking the FEIE you are assumed to continue taking it (as long as your pass the PPT or BFRT). Stopping and restarting the FEIE causes doubts as to whether you are truly working abroad and your future exclusions may be denied.

10) You may take the Foreign Housing Deduction/Exclusion (FHD) in addition to the FEIE. What is the FHD? All amounts paid for rent or lease, insurance, repairs, marina fees, mooring fees, utilities, etc may be deducted (not a credit) within a min/max range determined by the IRS. What is that range? The minimum FHD amount 16% of the $105,900 ($16944) and the max is 30% ($31770 but is adjusted upwards for high cost of living countries).

For example, let's say I have mortgage payments on my boat. I can't deduct my payments with the FHD because I am not renting or leasing. I can still deduct any mortgage interest I have just like I would with a home. Additionally, let's say I also paid $35000 in insurance, repairs, mooring fees, utilities, etc . Since $35000 is over the max of $31770 I would be able to deduct up to the max $31770, less the min, $16944 for a total deduction $14756 in addition to the FEIE. However, if I was in the Bahamas, the IRS adjusts the max deduction from $31770 to $49700 because the Bahamas is a high cost of living area. Therefore, my deduction would be $35000 less $16944 for a total deduction of $18056.

11) I don't believe that you can create a business entity that owns your boat and make payments to the entity to claim the FHD as this would violate the "arms length" rule with the IRS. I am sure this is possible though if you are using an owner/operator model and chartering, etc.

This is a really useful and mostly really accurate summary. Thanks for taking the trouble to write it!



Just a couple of comments:


8) is true only with respect to either (a) self-employment income; OR (b) U.S. source salary income. You do not pay U.S. payroll taxes on foreign source salary income.



7) is weirdly expressed and I think wrong (if I understood it correctly). The Exclusion as figured on Form 2555 goes into Schedule 1, Line 9. This gets thrown into the basket with other "Additional Income and Adjustments to Income", like rental property income or losses, business income or losses, etc. The net of all these goes into From 1040 at Line 7a. So this gets deducted from your income EITHER within Schedule 1 (by offsetting business income if you have it) OR by reducing Taxable Income which is figured at Line 11b. So the Foreign Earned Income Exclusion is NOT below the line, it is above the line, and so simply reduces your taxable income.



Which means you get to run through the brackets again, if your income is more than the Exclusion. So for example if you are single, and your taxable income but for the FEIE was $190 000, then the FEIE (assuming you qualify to take it all) will reduce your taxable income to $84 100, and you will pay tax as if you earned $84 100, to wit, $14 366, which is about 17% of $84 100.



If you think this contradicts what your adviser told you, I would suggest asking again. This particular point doesn't actually require expert advice, it follows clearly from the instructions and the forms.

[NPCampbell]

Originally Posted by Dockhead

8) is true only with respect to either (a) self-employment income; OR (b) U.S. source salary income. You do not pay U.S. payroll taxes on foreign source salary income.

I guess I should have been more specific about payroll taxes. The point I was trying to make is that the FEIE in no way lowers the amount of payroll taxes that are due.

My understanding is that if you work for a US employer, it doesn't matter where you work, you will have to pay US payroll taxes. Even if there is a totalization agreement between the US and the country you reside in, if you are working for a US employer, you pay US payroll taxes.

So in my narrow case of remote working for a US affiliate, I would still continue to pay 8%+ of my paycheck towards payroll taxes.

This is the IRS link on the specifics for payroll taxes: https://www.irs.gov/individuals/inte...working-abroad

[Dockhead]

Originally Posted by NPCampbell

I guess I should have been more specific about payroll taxes. The point I was trying to make is that the FEIE in no way lowers the amount of payroll taxes that are due.

My understanding is that if you work for a US employer, it doesn't matter where you work, you will have to pay US payroll taxes. Even if there is a totalization agreement between the US and the country you reside in, if you are working for a US employer, you pay US payroll taxes.

So in my narrow case of remote working for a US affiliate, I would still continue to pay 8%+ of my paycheck towards payroll taxes.

This is the IRS link on the specifics for payroll taxes: https://www.irs.gov/individuals/inte...working-abroad

Yes, this is all correct.


You don't pay only when the income is paid for work performed outside the U.S. by a foreign employer.


"Foreign employer" I would think would include the foreign affiliate of a U.S. company, but I haven't checked that.

[NPCampbell]

Originally Posted by NPCampbell

7) The FEIE is a "below the line" deduction. What this means is that you do not get to deduct the $105,900 from the top end or the higher tax brackets of your income. It is deducted from the bottom end and lower tax brackets of your income. For example, if you are a single filer making $200,000. Your last dollars earned for the year would be in the 32% tax bracket. You don't get to deduct 32% of $105,900 from your taxes. The first $9700 of your income is only taxed at 10% so you can only deduct 10% of the first $9700 of the FEIE amount of $105,900. Income after that to $39475 is taxed at 12%. Therefore you can deduct 12% of the FEIE of $105,900 from $9701 to $39475 and so on. For all practical purposes, you calculate what your taxes would be for a single filer on the FEIE of $105,900 and deduct that from your taxes. It's pretty much a constant depending on what status you file as, single, married, head of household, etc.

Originally Posted by Dockhead

7) is weirdly expressed and I think wrong (if I understood it correctly). The Exclusion as figured on Form 2555 goes into Schedule 1, Line 9. This gets thrown into the basket with other "Additional Income and Adjustments to Income", like rental property income or losses, business income or losses, etc. The net of all these goes into From 1040 at Line 7a. So this gets deducted from your income EITHER within Schedule 1 (by offsetting business income if you have it) OR by reducing Taxable Income which is figured at Line 11b. So the Foreign Earned Income Exclusion is NOT below the line, it is above the line, and so simply reduces your taxable income.



Which means you get to run through the brackets again, if your income is more than the Exclusion. So for example if you are single, and your taxable income but for the FEIE was $190 000, then the FEIE (assuming you qualify to take it all) will reduce your taxable income to $84 100, and you will pay tax as if you earned $84 100, to wit, $14 366, which is about 17% of $84 100.



If you think this contradicts what your adviser told you, I would suggest asking again. This particular point doesn't actually require expert advice, it follows clearly from the instructions and the forms.

I specifically asked the tax advisor about this. My final dollars for last year were in the 35% tax bracket so I asked if this effectively meant a tax reduction of 35% of $105,900 and he said, "no". He said it typically comes out to around $19k for single filers with no other deductions.

In looking at the reason for this I believe it is because the amounts from Form 2555 do not flow to your 1040 without going through the "Foreign Earned Income Tax Worksheet" including with the instructions for the 1040. In that worksheet, you calculate the tax on your AGI and subtract the tax on $105,900. Per the instructions, the resulting tax amount, not the deduction, flows through to line 12a on your 1040.

This effectively makes this a "below the line" deduction because you are only deducting the tax rate as applied with the standard tax tables on $105,900, not your ending tax bracket.

This is how it was explained to me ... but it's a pretty gnarly process so I'm sure there are things I may have missed.

[NPCampbell]

One thing that I forgot to mention is that according to the IRS, if you spend 1 minute in a day in the US or traveling in (or flying over) international waters then the entire day is considered as being in the US. So if you are transiting between islands and you venture outside of territorial waters, you will lose 1/365 of $106k, or $290 worth of deduction, for every day where any portion of the day is spent in international waters.

[Dockhead]

Originally Posted by NPCampbell

I specifically asked the tax advisor about this. My final dollars for last year were in the 35% tax bracket so I asked if this effectively meant a tax reduction of 35% of $105,900 and he said, "no". He said it typically comes out to around $19k for single filers with no other deductions.

In looking at the reason for this I believe it is because the amounts from Form 2555 do not flow to your 1040 without going through the "Foreign Earned Income Tax Worksheet" including with the instructions for the 1040. In that worksheet, you calculate the tax on your AGI and subtract the tax on $105,900. Per the instructions, the resulting tax amount, not the deduction, flows through to line 12a on your 1040.

This effectively makes this a "below the line" deduction because you are only deducting the tax rate as applied with the standard tax tables on $105,900, not your ending tax bracket.

This is how it was explained to me ... but it's a pretty gnarly process so I'm sure there are things I may have missed.

Or something I've missed. I'll have another look at it when I finish travelling.

[Time2Go]

If you are a US citizen you must file a tax return. It’s that simple.
However if you pay taxes in another country you can take that as a credit.
My sister has lived overseas for 40 years and has to file put pays
Nothing. She was very surprised to get a 1200 bonus from the US
recently. My daughter has lived overseas for 12 years and has to file
but also has no tax liability. She has a very high paying job in a country
with higher taxes.
Tread carefully here as the penalties are enormous and seizure laws
are way stacked against you.
Cheers
Neil