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Expatriate Tax Preparation and Understanding Exclusion of Foreign Earned Income

international mobility manager There is much confusion by what constitutes foreign earned income with respect to the residency location, the place that the work or service is performed, and also the supply of the salary or fee payment. Foreign residency or extended periods abroad from the tax payer is really a qualification to avoid double taxation.

Moreover, foreign source income is for services performed outside the U.S. If a person resides abroad and is employed by a company abroad, services performed for your company (work) on a trip on business in the U.S. is recognized as U.S. source income, and is not susceptible to exclusion or foreign tax credits. Additionally, residual income from a U.S. source, for example interest, dividends, & capital gains from U.S. securities, or U.S. property rental income, can also be not susceptible to exclusion.

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

Basically, the government recognizes that income earned abroad is taxed through 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 has no bearing on whether it is U.S. or foreign earned income, but rather in which the work or services are carried out (as in the example of an employee employed by the U.S. subsidiary abroad, and receiving his pay check from the parent U.S. company out of the U.S.).

So, Who Qualifies for Exclusion?

Generally there are two methods of expatriates to qualify for exclusions of foreign earned income:

Probably the most easy strategy is to file a unique form whenever during the tax year for postponement of filing that current year until a complete 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 following twelve month abroad following the year of transfer.

The 2nd strategy is to become overseas any 330 days in each full 12 month period abroad. These periods can overlap in the event of an incomplete year. In this instance the filing due date follows the conclusion of every full year abroad.