Do You Live or Work Abroad?

Since United States citizens and permanent residents are taxed on their worldwide income, individuals living and working abroad should be aware of the Foreign Earned Income Exclusion. This exclusion allows certain taxpayers to exclude foreign earned income from their worldwide income up to an amount that is adjusted annually for inflation. For the taxable year 2014, the maximum exclusion is $99,200. In order to qualify for the exclusion, you must first have foreign earned income. A few examples of foreign earned income are: salaries and wages, commissions, bonuses, professional fees, and tips. You must also meet one of two tests; which are the bona-fide resident test and the physical presence test.

To meet the bona-fide residence, the individual taxpayer must meet the following requirements:

  • The individual must be a U.S. citizen or a permanent resident who is a citizen of a foreign country that has a tax treaty with the U.S., and reside in a foreign country for an uninterrupted period of time. This includes an entire taxable year.
  • The individual must intend on staying in the foreign country. The individual is allowed to return to the U.S. for vacation or business purposes but would need to have clear intent to return to their foreign home.

To meet the physical presence test, the individual taxpayer must meet the following requirements:

  • The individual needs to reside in a foreign country for 330 days in a 12 month period. These days do not have to be consecutive. And the rule applies to both U.S. and resident aliens.
  • The test does not take into consideration on what kind of residence you establish, the nature of stay in the foreign country, or your intentions on returning to the U.S.

Ultimately, the individual would need to file Form 2555 to claim the Foreign Earned Income Exclusion. The amount of exclusion allowed is the lesser of foreign earned income for the year, or the maximum exclusion, divided by the number of days in the year multiplied by the number of qualifying days. The exclusion must also be reduced by above-the-line deductions allocable to foreign earned income.

If you think you may benefit from a Foreign Earned Income Exclusion and would like to discuss this further, please contact Kurt DiManna via Email or by calling 301-652-6700.