GoodinRisner328

Expatriate Tax Preparation and Understanding Exclusion of Foreign Earned Income

expatriation definition There's much confusion about what constitutes foreign earned income with regards to the residency location, the location where the work or service is performed, and also the source of the salary or fee payment. Foreign residency or long periods abroad from the tax payer is really a qualification to prevent double taxation.

Moreover, foreign source earnings are for services performed outside the U.S. If a person resides abroad and works for a company abroad, services performed for that company (work) while traveling on business within the U.S. is considered U.S. source income, and isn't susceptible to exclusion or foreign tax credits. Additionally, passive income from a U.S. source, for example interest, dividends, & capital gains from U.S. securities, or U.S. property rental income, is also not subject to exclusion.

Conversely, earned income abroad, and residual income from foreign securities, rental, or any other activities abroad, can be excluded from U.S. taxable income, or foreign taxes paid thereon, can be used as credits against U.S. taxes due.

Basically, the IRS recognizes that income earned abroad is taxed by the resident country, and could be excluded from taxable income by the IRS if the proper forms are filed. The origin from the income salary paid for earned income doesn't have effect on whether it's U.S. or foreign earned income, but rather in which the work or services are carried out (as with the example of an employee working for the U.S. subsidiary abroad, and receiving his pay check in the parent U.S. company from the U.S.).

So, Who Qualifies for Exclusion?

Truth be told there are two ways for expatriates to qualify for exclusions of foreign earned income:

Probably the most easy way is to file for a unique form any time during the tax year for postponement of filing that current year until a full tax year (usually calendar) continues to be carried out a foreign country as the taxpayers principle host to residency. This is typical because one transfers overseas in the middle of a tax year. That year's tax return would only be due in January following completing the next full year abroad after the year of transfer.

The 2nd way is to be overseas any 330 days in each full Year abroad. These periods can overlap in case of a partial year. In this case the filing due date follows the completion of each twelve month abroad.