If you happen to be employed in a foreign country and a citizen of the US you may be entitled to the foreign earned income exclusion for your 2018 taxes and this means you may be able to deduct a $104,100 from your earnings or even more if you happen to incur housing costs. Within this article, you will find tips and advice to help ensure the foreign earned income tax exclusion is used for maximum benefit. You will learn about the different rules and details of this tax law and find out whether or not this applies to you. Continue reading below as we discuss the different elements in this tax break and how you can use it to your full advantage. It will benefit many different people who work in foreign countries that wish to pay less in taxes.
Is FEIE Right for Me?
The foreign earned income exclusion can help lower or completely remove all tax duties if you have been working overseas. This tax law is only available for money earned while self-employed or working for an employer and doesn’t include investment income that may include things like rental income, interest or dividends. You may also qualify for this tax exclusion if the country you are working in does not do income tax assessments or any forms of compensation. In order to take advantage of this exemption, you must have lived and worked abroad for one full year. You must work for a consecutive year and be inside the foreign country for a full 330-days during the taxable year.
There is also partial-year exclusions that may be available if you have recently moved to a different country or if you have returned to the USA mid-year. This exemption is only available for people who work outside the US as employees for the US or non-US employer and for people who work outside the US that are self-employed. Unfortunately, people who are employed by the government cannot claim this foreign income exclusion. But if you are an employee of a private company that is contracted by the US government then you may be eligible.
Claiming Tax Exemption Under FEIE
If you decide to try and claim the foreign tax credit these are reasons why it may be a good idea. If you are paying a foreign tax higher than the U.S. tax rates or if you wish to use an individual retirement arrangement or you might qualify for certain family-related tax breaks based on non-excluded money earned. Some people may choose to use the foreign tax credit such as small business operations who need to use capital or inventory as an integral part of their business requirements. The tax credit and foreign earnings exemption are two entirely different things and have different uses and features.
Some people who work overseas may not have enough time to file their taxes. You can request a tax filing extension if you meet the following requirements listed as follows. With late elections to claim the tax exclusion, you must either claim your taxes within one year of the date you plan on returning or by amending a filed return in a timely matter. You can also claim this exclusion if the IRS hasn’t found your failure to file your return claiming the exclusion or if you do not owe tax after taking the exclusion into effect. If you have not filed your tax returns in previous years you may still be able to exclude your foreign earned income. You may be able to eliminate your tax liabilities and any possible penalties or interests as well.
If you work in a foreign country you may incur foreign housing expenses that you may actually be able to exclude or deduct. This is available for foreign US workers who have out of pocket housing expenses or an employer-provided housing amount that is included in their earned income. This tax deduction is available for those who are self-employed paying foreign housing costs. The total amount of the housing exclusion or deduction is based on your actual housing costs and a base amount for your foreign country where you reside. This can help tremendously when it comes to saving more money and paying much less on taxes for the income earned while overseas.
When it comes to filing your taxes while you are working in a foreign country as a US citizen can be incredibly confusing and not to mention stressful. Every person who works overseas will have a different tax situation that will require adequate expertise.
Watch & Learn!
Hit the play button below to see a video that quickly explains how the foreign earned income exclusion tax law works and if it applies to you.