Foreign Income Exclusion & the IRS
Foreign Earned Income Exclusion: The United States follows a worldwide income taxation model. That means the IRS requires U.S. Persons to file an annual tax return to report their worldwide income. Worldwide income includes foreign income, such as: Wages, Consulting Fees, Real Estate Income, Dividends, Interest and Capital Gains. When it comes to earned income from wages or self-employment, the IRS has developed the Foreign Earned Income Exclusion to assist taxpayers who qualify.
When a U.S. Taxpayer qualifies for the Foreign Earned Income Exclusion, they may be able to exclude upwards of $105,000 (adjusted for inflation) each year from their tax returns.
They may also claim a Foreign Housing Exclusion.
In addition, the Taxpayer may also apply foreign tax credits to the income as long as they do not “double-dip” for the same income dollars that the FEIE was applied to.
How do I Qualify?
In order to qualify for Foreign Earned Income Exclusion, there are a few main requirements:
- The taxpayer must be employed or generate self-income (in other words, the taxpayer cannot be employed by the US government).
- The taxpayer must have employment income (unlike the foreign tax credit, the Foreign Earned Income Exclusion refers to “earned” income – as opposed to passive income)
- The taxpayer must meet either the bona fide residence test or the physical presence test.
- The taxpayer must call the foreign country his or her tax home.
Bona-Fide Resident and Physical-Presence Test
A Taxpayer must meet one of the two tests listed below.
Physical Presence Test
- When it comes to qualifying for the Foreign Earned Income Exclusion, the physical presence test is the easier of the two tests and simply requires “presence” in foreign countries for a specific time-period. To qualify for the physical presence test the taxpayer must reside overseas (not necessarily in one foreign country) for at least 330 days in any 12-month period; it is a mere “Physical Presence Test.”
- Thus, if the taxpayer resided overseas from May 2014 through May 2015, he or she could qualify for the Foreign Earned Income Exclusion for that time-period. (it does not need to be January through December). If a taxpayer qualifies for the physical presence test they generally will meet the exclusion requirements.
Bona-Fide Resident Test
For taxpayers who do not meet the 330-day test, they may try and qualify for the “bona-fide resident of a foreign country or countries test”. As you may imagine, this test is much more difficult to meet and requires more of a “totality of the circumstances” analysis.
It is important to keep in mind that the Internal Revenue Service is very strict when it comes to the bona fide residence test. If you are an overseas contractor who does not meet the 330 day physical presence test it will be extremely difficult if not impossible to qualify to be a bona fide resident. (Overseas contractors are the group of taxpayers who get themselves in the most trouble in trying to take this exclusion.)
- For example, you work for a US company and/or reside in housing that is provided to you by the company, shop at stores owned or recommended by the company, do not have a local drivers license, voter registration card, bank account, etc. then the IRS is not going to grant you the exclusion. Essentially, you must “immerse” yourself into the culture of the country you are working in.
What if I am audited for taking the Foreign Earned Income Exclusion?
Being audited for the Foreign Earned Income Exclusion is a big deal.
That is because you have essentially avoided paying tax on upwards of $105,000+ of income and housing allowance which if disallowed will cost you tens of thousands of dollars of taxes due – and it could be for multiple years.
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe. Our attorneys have worked with thousands of clients on offshore disclosure matters, including FATCA & FBAR.
Each case is led by a Board-Certified Tax Law Specialist with 20 years of experience, and the entire matter (tax and legal) is handled by our team, in-house.
*Please beware of copycat tax and law firms misleading the public about their credentials and experience.
Less than 1% of Tax Attorneys Nationwide Are Certified Specialists
Sean M. Golding is one of less than 350 Attorneys (out of more than 200,000 practicing California Attorneys) to earn the Certified Tax Law Specialist credential. The credential is awarded to less than 1% of Attorneys.
Recent Golding & Golding Case Highlights
- We represented a client in an 8-figure disclosure that spanned 7 countries.
- We represented a high-net-worth client to facilitate a complex expatriation with offshore disclosure.
- We represented an overseas family with bringing multiple businesses & personal investments into U.S. tax and offshore compliance.
- We took over a case from a small firm that unsuccessfully submitted multiple clients to IRS Offshore Disclosure.
- We successfully completed several recent disclosures for clients with assets ranging from $50,000 – $7,000,000+.
How to Hire Experienced Offshore Counsel?
Generally, experienced attorneys in this field will have the following credentials/experience:
- 20-years experience as a practicing attorney
- Extensive litigation, high-stakes audit and trial experience
- Board Certified Tax Law Specialist credential
- Master’s of Tax Law (LL.M.)
- Dually Licensed as an EA (Enrolled Agent) or CPA
Interested in Learning More about Golding & Golding?
No matter where in the world you reside, our international tax team can get you IRS offshore compliant.
Golding & Golding specializes in FBAR and FATCA. Contact our firm today for assistance with getting compliant.