Maximizing the Foreign Earned Income Exclusion: A Guide for US Expats

January 29, 2024

The Foreign Earned Income Exclusion (FEIE) offers a significant opportunity for U.S. citizens living abroad to reduce their tax burden. The US uniquely taxes its citizens on global income, leading to potential double taxation. The FEIE is a valuable tool to mitigate this.

Understanding the FEIE

This exclusion is especially beneficial for US citizens in low or no-tax countries, as local tax payment isn't a prerequisite. Annually adjusted for inflation, the FEIE for 2023 stands at $120,000.

The exclusion amount is the lesser of your foreign earned income or the maximum exclusion limit, proportionate to your qualifying days in the tax year.

Real-World Example: Simplifying the FEIE

To demystify the FEIE, let's consider Nicky Saban, a US citizen who moved to Costa Rica in July 2022 to work remotely as a graphic designer. Earning $100,000 in 2022, Nicky spent no days in the US post-move, rented out his Texas home, and settled into a year-long lease in Costa Rica.

Who Qualifies for the FEIE?

Qualification for the FEIE hinges on your tax home being in a foreign country and meeting one of these tests:

  • Bonafide Residence Test (BFR): Requires full calendar year residency abroad.
  • Physical Presence Test (PPT): Requires at least 330 full days in a foreign country over a 365-day period, not necessarily within a single calendar year.

Both tests demand that your income is earned while working abroad and that your tax home is outside the US for the qualifying period.

Applying the FEIE: Nicky’s Scenario

For Nicky, the analysis is as follows:

  • His income from graphic design services qualifies as foreign earned income.
  • His tax home shifted to Costa Rica, satisfying the tax home requirement.
  • Nicky doesn't meet the BFR for 2022 but qualifies under the PPT for half of the year, making him eligible for $56,000 of the FEIE.

Nicky would file Form 2555 with his 2022 US tax return to claim the FEIE.

Beyond the FEIE

While the FEIE can significantly reduce tax obligations, it's part of a broader tax strategy that may include considerations like housing exclusions, self-employment tax, foreign tax credit, and state taxes.

The FEIE is a potent tool for US expats, but it's complex. Professional guidance is key to navigating it effectively.

Disclaimer: This article is for informational purposes and should not be construed as tax advice. For expert guidance on US international tax planning and consulting, contact McGowin Tax LLC. Visit https://www.mcgowintax.com/ or email Alex McGowin at alex.mcgowin@mcgowintax.com.


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