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Foreign Earned Income Exclusion

Posted by: Zaher Fallahi
Posted On: Feb 22, 2014

If you are a U.S. citizen or a resident alien of the United States and you live abroad, you are taxed on your worldwide income. In addition, you are subject to all the US international tax laws including Report of Foreign Bank & Financial Accounts (FBAR), Foreign Account Tax Compliance Act (FATCA), and others.

You may exclude up to an amount of your foreign earned income that is adjusted annually for inflation ($91,500 for 2010, $92,900 for 2011, $95,100 for 2012, and $97,600 for 2013). In addition, you can exclude or deduct certain foreign housing amounts. This exclusion can only be taken by filing the tax returns. It doesn’t apply to un-earned income (see below). Neither does it waive the requirements for filing the FBAR and FATCA (see below).

Generally, the foreign income may be classified to three categories; Earned Income, Un-earned Income and Variable Income. Earned income includes salaries & wages, commissions, bonuses, professional fees and tips. Unearned income includes dividends, interest, capital gains, gambling winnings, alimony, social security benefits, and annuities. Variable income may fall into either one of these categories under the circumstances and includes business income, royalties and rents.

For addition information on FBAR, see http://zflegal.wpengine.com/services/report-of-foreign-bank-and-financial-accounts-fbar.

If the FBAR report is not filed timely, it may require an Offshore Voluntary Disclosure. For additional information on the Offshore Voluntary Disclosure Program (OVDP) see http://zflegal.wpengine.com/services/offshore-voluntary-disclosure-program-ovdp

For additional information about FATCA see http://zflegal.wpengine.com/services/foreign-account-tax-compliance-act-fatca

If you meet certain requirements, you may qualify for the foreign earned income and foreign housing exclusions and the foreign housing deduction.

You may also be entitled to exclude from income the value of meals and lodging provided to you by your employer. Here are some helpful links:

Can I Claim the Exclusion or Deduction?

Tax Home In A Foreign Country

Bona Fide Resident test
Physical Presence Test
Exceptions to Tests

Figuring The Exclusion
Choosing The Exclusion
Revocation
Which Form to File

Foreign Housing Exclusion or Deduction

Individual Retirement Arrangements
Extension to Claim Foreign Earned Income Exclusion

Application of Foreign Earned Income Exclusion and the Combat Zone Exclusion to Civilian Contractors Working in Combat Zones (PDF)

 

If you are a US citizen or green cardholder living abroad, for assistance with tax preparation, tax planning, the IRS representation and disclosing your unreported foreign bank accounts, you may contact Zaher Fallahi, Tax Attorney, CPA, at (310) 719-1040 (Los Angeles) or (714) 546-4272 (Orange County), or e-mail to taxattorney@zfcpa.com.