General Questions - Foreign Earned Income Exclusions
The foreign earned income exclusions, sometimes referred to as the Sec. 911 exclusions, exclude tax on wages earned from woking abroad. The exclusions comprise 2 parts - an income exclusion and a housing exclusion. The following FAQs discuss the benefit of the exclusions including when both spouses are expats in a general manner. See our qualifying page for many of the specifics on how to claim the tax benefit of these exclusions.
What are the foreign earned income exclusions?
The income exclusion is now indexed for inflation. The maximum annual income exclusion is $97,600 for 2013.
How is the tax benefit calculated?
The tax benefit excludes the income from tax at bottom tax rates. Previously, the exclusions "came off the top" reducing income subject to tax at the top tax rates. The exclusions may or may not reduce income used for other purposes, such as IRA limits, child credits, personal exemptions, etc.
Is my income "tax free"?
No. These exclusions do not exempt the wages from US taxation but merely provide a tax reduction. Note that a single person working abroad for all of 2007 who earned about $95,000 with no other income will not have tax reduced to zero - effectively the same answer as being "tax free."
How are foreign earned income exclusions computed in the year of arrival or departure?
The exclusions are computed on a daily basis. The more qualifying days that you have in your tax year, the greater the potential tax benefit.
For example, say that your qualifying period is from July 1, 2007 to June 30, 2008. Half of this qualifying period is in 2007 so you will receive about half of the income exclusion that year, or $42,850 ($85,700 annual exclusion X 183 days in qualifying period / 366 days in that 12 month period.)
Can I exclude income from working in the states?
No. Only income attributable to working abroad may be excluded. If you attended business meetings or seminars in the US while living abroad, income for those days cannot be excluded.
Do my wages need to be paid abroad to claim the exclusions?
Your wages can be paid in the US or abroad. Your employer's location or the place where wages are paid are not factors in qualifying for the exclusions.
If I keep my wages in an offshore bank account, will they be exempt from tax?
No. For US tax it does not matter where you keep your funds - you are taxable on your worldwide income as a US person. This question seems to come from Brits where the transfer of funds appears to be a factor for UK taxation.
While bringing your wages into the US is not a taxable event, you may still have to declare the cash, travelers checks or other negotiable instruments to the Treasury upon entry. This discussion is beyond the scope of this web site. You also need to report certain foreign financial accounts yearly to the Treasury.
How does the benefit change if my spouse also works overseas?
The foreign housing exclusion provides a partial exclusion to offset some of the higher costs of keeping a foreign residence. The benefit of the housing exclusion has been significantly limited under recent legislation.
What is the foreign housing exclusion?
You and your spouse are each entitled to your own income exclusion. You can only exclude wages that you personally earned - you cannot use community income concepts to "share" the income or exclusions. If you are living together at the same foreign location, only one spouse can claim the housing exclusion. If you are working at different locations, then each of you may claim a housing exclusion for your separate housing costs.
How do I qualify for the exclusions?
- Qualifying for the Foreign Earned Income Exclusions
- ►General Questions
- ►Physical Presence Test
- ►Counting Days in the US, Abroad and Traveling
- ►Bona Fide Residence
- ►War Zones and Military Contractors
- Income and Social Tax Withholding
- ►Social Security and Medicare Taxes
- ►Income Tax Withholding
- ►Hypothetical Tax
- ►Totalization Agreements
- ►Due Dates and Extensions
- ►Expatriate Tax Forms
- ►IRS Addresses
- ►Other Resources