Taxes should never be paid in excess of what is required. If they meet the minimal level for an income tax filing requirement, US residents and green card holders of Dallas residing abroad must file a US tax return annually. If you must file and pay taxes in both the US and foreign countries, there are methods to prevent double taxation. The Foreign Earned Income Exclusion (FEIE) is one way that U.S. expats can lower their tax liability. The FEIE can reduce, if not eliminate, an expat’s US tax obligations, which is a lifesaver for many. If you need more information regarding this, contact tax services in Dallas.
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Can the foreign income for US citizen expats be excluded?
You are subject to worldwide income tax if you are a U.S. citizen or resident alien and you reside overseas. However, up to a certain amount of your abroad earnings that is yearly adjusted for inflation, you can have it excluded from earned income.
The IRS modifies the FEIE’s maximum amount yearly to reflect inflation. The highest amount was $105,900 for the 2019 tax year. However, the 2020 maximum amount for the Foreign Earned Income Exclusion has increased to $107,600. That means that you can avoid paying taxes on the first $107,600 of your foreign-earned income in 2020.
The exclusion does not apply to foreign-earned income.
It is crucial to remember that the foreign income earned exclusion does not apply to all foreign income. The following categories of income are listed by the IRS as not being covered by the FEIE:
- Salary received when working for the US government or a similar company
- Compensation for labor in international waters
- Compensation in specified combat zones
- Payments made during the year after services were rendered but after the tax year ended
- The amount of housing and food that are not reflected in income since they have been given for the employer’s convenience
- Payments from pension or annuities, including social security benefits.
- The list of earnings that are not eligible for the FEIE is not inclusive.
Being eligible for the Exclusion of Foreign Earned Income
Either the bona fide residence (BFR) or the physical presence test (PPT) must be used to qualify for the exclusion.
You must have spent the entire calendar year overseas in order to apply the bona fide residency test.
In order to apply the physical presence criteria, you must have spent 330 days in a foreign nation over a 12-month period. In the year that you are taking benefit of the foreign income exclusion, the 12-month period may begin or conclude. Furthermore, you have the choice to select the 12-month term that provides you with the most amount of qualifying days and is most advantageous to you.
Using the Exclusion for Foreign Housing
You may be eligible for the abroad focusing deduction to reduce your tax liability further if you pass the actual presence or bona fide residence tests! Rent, utilities, and repairs are among the qualifying living expenses that can be exempt from taxation under the exclusion of abroad housing. Housing expenses do not include mortgage loan payments.
Your total foreign earnings for the taxable year cannot be greater than your foreign housing expenses. Your abroad housing deduction cannot exceed your foreign-earned earnings less the total of your housing exclusion and your foreign-earned income exclusion.
Your regular income tax will be reduced by the foreign living exclusion and the deduction, but your self-employment tax will not be lowered.
How to Take Advantage of the Exclusion for Foreign Earned Income
You must fill out Form 2555 in order to use the FEIE if you are eligible. If you have registered in the FEIE, you can proceed by attaching the completed Form 2555 to the Federal Tax Return Form 1040.