FOREIGN EARNED INCOME EXCLUSION FOR U.S. EXPATS
If you’re an expat, you might qualify for a foreign income exclusion from your 2016 U.S. taxes, up to $101,300 or even more if you incur housing costs.
Let our experienced expat tax advisors help prepare your tax return this year to ensure the foreign earned income tax exclusion is being handled properly. Visit the Virtual Expat Tax Preparation page to get started claiming your foreign earned income exclusion today.
What Can You Exclude?
This exclusion is only available for earned income and doesn’t apply to investment income such as interest and dividends.
The exclusion usually applies to those who have lived abroad for at least one full year. However, partial-year exclusions are available if you’ve recently moved to a foreign country or returned to the U.S. mid-year.
Expat Tax Extensions
Even if you haven’t been out of the country long enough to claim the exclusion by your filing date (June 15 for expats), you can request an extension to file until you’ve met these time requirements.
Who Can Benefit
The foreign earned income exclusion is available to expats who either:
- Work as employees
- Work in a self-employed or partner capacity
Income is classified as foreign if the work is performed outside the U.S. So, even expats who work abroad for a U.S. employer can qualify. Employees of the U.S. government can’t claim the foreign income exclusion. However, an employee of a private company under contract with the U.S. government might still be eligible.
Foreign Tax Credit vs. Exclusion
You might qualify for the foreign earned income exclusion even if you're paying no foreign tax on income earned abroad. However, if you're paying foreign tax, you can't use a foreign tax credit and exclusion on the same income.
If you qualify for both the foreign income exclusion and the foreign tax credit, consult with your expat tax advisor to choose the best benefit. Claiming the foreign tax credit might be the better option if any of these apply:
- You're paying foreign tax at a higher rate
- You wish to participate in an indvidual retirement arrangement (IRA)
- You qualify for certain family-related breaks based on non-excluded income
The foreign tax credit might also be a better choice for expats with small business operations that use capital or inventory as an important part of their business.
It’s important to choose between the foreign income exclusion and tax credit wisely. If you claim the exclusion and then change back to the foreign tax credit, you can't easily claim the exclusion again for five years. The only way to claim the exclusion again involves a costly process with the IRS. Working with an expat tax advisor can help you understand your options.
Late Elections to Claim the Foreign Earned Income Exclusion
Usually, you must claim the exclusion either:
- Within one year of the due date of your return
- By amending a timely filed return
However, you can still claim the exclusion after these dates if either:
- The IRS hasn't discovered your failure to file
- You owe no tax after taking the exclusion into account
If you haven't filed returns in prior years, you might be able to exclude your foreign earned income from U.S. tax. This could have the effect of eliminating your tax liability and any penalties and interest that would be assessed.
Foreign Housing Exclusion or Deduction
If you’re an expat and you incur foreign housing expenses, you might be able to exclude or deduct them. The exclusion is available for expats working as employees with either:
- Out-of-pocket housing expenses
- Employer-provided housing amount included in their wages
The tax deduction is available for self-employed expats paying foreign housing expenses. The amount of your housing exclusion or deduction is based on the difference between the following:
- Your actual foreign housing expenses
- A base amount for your foreign country of residence
File Your Foreign Earned Income Exclusion with H&R Block
Filing taxes while living and working abroad can be overwhelming and stressful. As an expat, your tax situation is very different and requires specialized expertise. Visit our Virtual Expat Tax Preparation page to learn more and get started with your U.S. tax return today!