This is a great question. We all look for ways to minimize our U.S. tax bill and maximize our freedom abroad. We all desire to simplify our tax and reporting responsibilities. We want to think less about taxes…and enjoy more of our international experience.
The promise of the foreign earned income exclusion (FEIE) is that you can earn as much as $95,100 in foreign income and not pay a dime of U.S. income tax on it.
This is a great opportunity to save on U.S. taxes. The FEIE is one of the top three tax benefits available only to those Americans earning income overseas. Whether you are employed abroad, provide international consulting, or run your own foreign business, the FEIE can reduce your U.S. tax bill.
However, working abroad and earning less income than the FEIE exclusion does not exempt you from filing a U.S. income tax return. In fact, in order to qualify for it, you must actually file a U.S. tax return. Yes, that’s right; you have to file a tax return in order to receive its benefits.
Here are some of the key points you need to know about receiving the FEIE tax break:
∗ The U.S. taxes its citizens on worldwide income—all the income you earn abroad as well as the income you earn in the U.S. The FEIE gives you a tax exclusion on up to $95,100 of your overseas earned income. That means no U.S. taxes on your first $95,100.
∗ Uncle Sam is willing to give you that tax break only if you tell him about your foreign earned income. Plain and simple, you have to file a U.S. tax return in order to receive the FEIE tax break. If you choose not to file a tax return, as some expats do, you may lose the chance to use the FEIE later. If you lose the chance to use the FEIE, the earned income that might have been excluded from tax will now be fully taxable and might have penalties and interest added as well. There’s no good reason for you to take this risk.
∗ Filing an annual U.S. tax return may protect you from future audit. This is a little-known benefit of filing your annual tax return—the statute of limitations restricting the IRS from auditing your return starts when you file a return and ends three years later. That is a great protection that is included when you file your tax return electing the FEIE.
In order to get all your tax benefits from earning foreign income, we encourage you to be an informed expat. The foreign earned income exclusion (FEIE) and other U.S. tax benefits are discussed in International Living’s new Expat Taxes Made Easy: The Complete Guide to U.S. and Foreign Taxes for the American Overseas (which I worked on).
About the author: Nick Hodges is a CPA/PFS, MBA, CFP. That means that when it comes to expats and U.S. taxes—he’s the expert. He’s helped Americans overseas mitigate their taxes for over 20 years.