Qualifying for a Foreign Earned Income Exclusion

Foreign earned income exclusion is a type of tax exemption intended for US citizens or resident US aliens who live and work in foreign countries. If you qualify for the exclusion, you can take out up to $91,400 of your foreign earnings from the computation of your taxable income. Additionally, you can also claim foreign housing exclusions and deductions. To take advantage of this type of income exclusion, you need to meet certain requirements.

1. Foreign Country as Tax Home

Apart from being a US citizen or resident alien, you need to be in a foreign country and earning foreign income in order to qualify for this type of exclusion. In other words, your income must come as a result of working abroad.

A foreign country can be defined as any territory outside the United States. Thus, you will still not be allowed any exclusion if you are working in Guam, Puerto Rico, American Samoa, US Virgin Islands, the Commonwealth of the Northern Mariana Islands, and the Antarctic Region. Also, the term foreign country does not take into account aircraft and ships passing through international airspace or waters. Offshore rigs and installations are also not considered as foreign countries.  

2. Bona Fide Residence Status

A taxpayer who wants to qualify for foreign earned income exclusion must be a bona fide or legitimate resident of the foreign country from which the income was earned. A bona fide resident status can only arise if the taxpayer has resided in a foreign country for a continuing period that includes one full calendar year, starting on January 1 and ending on December 31. It must be noted that foreign income can be earned from several foreign countries.  The most important factor to consider in this test is the period that the taxpayer has spent working in a foreign country.

However, regardless of the length of your stay, the legitimacy of your residency in a foreign country ends if you submit a statement claiming that you are not a resident of the foreign country and if the authorities in the foreign country declare that you will not be subject to their internal revenue laws.  

3. Bona Fide Physical Presence

Other than the bona fide residency, you can also use bona fide physical presence as qualification for foreign earned income exclusion. It must be emphasized that you do not need to pass both the residency and physical presence tests. Meeting either of these two requirements entitles you to the income tax exclusion.

To prove your bona fide physical presence in a foreign country, you must have lived or be physically present in that country for a minimum of 330 days during a 12 month period. This does not mean that you have to be in the foreign country for 330 consecutive days. So, you can go back to the US or move to any other country for whatever purpose for as long as you meet the minimum number of days required in a year.

4. Foreign Tax Credit must not Be Claimed

When claiming foreign earned income exclusion, make sure that you do not claim any foreign tax credit on the income that has been excluded. A foreign tax credit will automatically cancel your foreign income exclusion.



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