The excluded amount will reduce your regular income tax but will not reduce your self-employment tax. Also, as a self-employed individual, you may be eligible to claim the foreign housing deduction instead of a foreign housing exclusion.
The Foreign Earned Income Exclusion can help reduce or eliminate U.S. taxes on foreign income earned while working abroad, but it doesn't apply to all sources of income. This exclusion is only available for earned income and doesn't apply to passive or investment income such as interest and dividends.
The Foreign Earned Income Exclusion, or FEIE, is also known as Form 2555 by the IRS. This expat benefit allows you to avoid double taxation by excluding up to a certain amount of foreign earned income from your US taxes. In 2024, for the 2023 tax year, you can exclude up to $120,000 of foreign earned income.
FEIE may be more beneficial for individuals who earn relatively low amounts of foreign income and meet the eligibility requirements. On the other hand, FTC may be more advantageous for individuals who earn higher amounts of foreign income and are subject to higher foreign tax rates.
The foreign tax credit is intended to relieve you of the double tax burden when your foreign source income is taxed by both the United States and the foreign country. The foreign tax credit can only reduce U.S. taxes on foreign source income; it cannot reduce U.S. taxes on U.S. source income.
In some cases, taxpayers can elect to carry back excess foreign tax credits to the previous tax year (typically one year). This can result in a refund of taxes paid in the prior year if the foreign tax credit exceeds the U.S. tax liability for that year.
The IRS limits the foreign tax credit you can claim to the lesser of the amount of foreign taxes paid or the U.S. tax liability on the foreign income. For example, if you paid $350 of foreign taxes and owed $250 of U.S. taxes on that same income, your tax credit will be limited to $250.
However, if you have a relatively high income in a country with a low tax rate, you may apply the Foreign Earned Income Exclusion to the first $120,000 and then use the Foreign Tax Credit to reduce the tax on the income above the $120,000 limit.
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. However, you may qualify to exclude from income up to $112,000 (for 2022) of your foreign earnings.
However, you may qualify to exclude your foreign earnings from income up to an amount that is adjusted annually for inflation ($107,600 for 2020, $108,700 for 2021, $112,000 for 2022, and $120,000 for 2023).
The exclusion applies only to foreign earned income. Other income, such as pensions, interest, dividends, capital gains, US-sourced income, etc., cannot be excluded with the FEIE. You are liable for full US tax on these types of income.
To pass this test, all of the following must be true: You have foreign earned income. You have a tax home in a foreign country. You have been physically present in a foreign country for at least 330 days out of any 12-month period.
The United States distinguishes itself as one of the few nations globally that imposes taxes based on citizenship rather than residency. For Americans living abroad, this means that their global income is subject to US income tax laws, mirroring the tax obligations of those residing within the country.
In 2022, you were paid $100,000 for work you did in the foreign country during that year. You excluded all the $100,000 from your income for 2022. In 2023, you received $20,000 for work you did in the foreign country in 2022. You can exclude $12,000 of the $20,000 from your income in 2023.
If you qualify, you can use Form 2555 to figure your foreign earned income exclusion and your housing exclusion or deduction. You cannot exclude or deduct more than your foreign earned income for the year.
1. I'm a U.S. citizen living and working outside of the United States for many years. Do I still need to file a U.S. tax return? Yes, if you are a U.S. citizen or a resident alien living outside the United States, your worldwide income is subject to U.S. income tax, regardless of where you live.
If you cannot find what you are looking for on this page, please email us at info@palazzotax.com or give us a call at 866-272-9224. *The following states do not allow the foreign earned income exclusion to be included on the state return: Alabama, California, Hawaii, Massachusetts, New Jersey, and Pennsylvania.
The revoked exclusion rule is designed to prevent taxpayers abroad from switching each year between FEIE and FTC. Simply put, if you had been using FEIE then switch to using FTC, then you are prohibited from switching back to use FEIE for a period of five years.
File Form 1116, Foreign Tax Credit, to claim the foreign tax credit if you are an individual, estate or trust, and you paid or accrued certain foreign taxes to a foreign country or U.S. possession. Corporations file Form 1118, Foreign Tax Credit—Corporations, to claim a foreign tax credit.
Foreign Tax Credit
If you qualify for the Foreign Tax Credit, the IRS will give you a tax credit equal to at least part of the taxes you paid to a foreign government. In many cases, they will credit you the entire amount you paid in foreign income taxes, removing any possibility of US double taxation.
The source of your earned income is the place where you perform the services for which you receive the income. Foreign earned income is income you receive for performing personal services in a foreign country. Where or how you are paid has no effect on the source of the income.
The Foreign Tax Credit (FTC) is one method U.S. expats can use to offset foreign taxes paid abroad dollar-for-dollar. Tax credits in general work like this: If you owe the U.S. government $1,500 in taxes and you have a $500 tax credit, you'll end up only owing $1,000 — and the Foreign Tax Credit is no different.
For tax year 2024, the foreign earned income exclusion is $126,500, increased from $120,000 for tax year 2023. Estates of decedents who die during 2024 have a basic exclusion amount of $13,610,000, increased from $12,920,000 for estates of decedents who died in 2023.
In general, the foreign earned income exclusion allows you to treat up to $120,000 of your income in 2023 (taxes due in 2024) as not taxable by the United States. In 2024 (taxes due 2025), the exclusion rises to $126,500. You have to live and work in a foreign country for this to apply.
As a non-refundable tax offset, the foreign income tax offset reduces your income tax payable (including Medicare levy and Medicare levy surcharge). Under the tax offset ordering rules, the foreign income tax offset is applied after all other non-refundable tax and non-transferable offsets.