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Foreign Earned Income Exclusion

U.S. resident aliens living in a foreign country are subject to the same U.S. tax laws as those living in the United States. However, if you lived and worked abroad for most of the year, you might qualify for the foreign earned income exclusion. If you qualify, you can exclude up to $100,800 in income you earned in 2016 while working abroad.

To qualify, you must have foreign-source earned income. All of these must apply:

  • This earned income includes compensation like:
    • Salaries
    • Wages
    • Commissions
    • Professional fees
  • You earned your income while performing services in a foreign country.
  • You satisfy the bona fide resident or physical presence test.

To be considered a bona fide resident, you must:

  • Live in a foreign country for the entire tax year without interruption
  • Not make a statement to the foreign government denying residence status
  • Intend to make a home in the foreign country for an indefinite period of time. You must apply a facts-and-circumstances test to determine where you intend to make your home.

To pass the physical presence test, both of these must apply:

  • You must be present in a foreign country for at least 330 full days.
  • Those 330 full days must be within a consecutive 12-month period.

You must also satisfy the tax-home test. Your tax home must be in a foreign country throughout your bona fide residence or physical presence.

Certain earnings while you're self-employed might be earned income. This applies when capital is a material income-producing factor.

Material income-producing factors include activities that involve:

  • Labor
  • Inventory

In these cases, the earnings considered earned income are the lesser of:

  • The value of the services actually rendered
  • 30% of your share of the net profit

Foreign-source earned income doesn't include:

  • Compensation or wages from the U.S. government or its agencies -- This includes payment to members of the military or civilians working abroad.
  • Value of meals and lodging excluded from income -- It was furnished for the convenience of the employer.
  • Pension and annuity income, including Social Security benefits
  • Wages paid by the U.S. government or one of its agencies
  • Amounts included in income due to employer contributions to a nonexempt employee trust or nonqualified annuity contract
  • Payments you receive after the end of the tax year after the tax year when you performed the services that earned the income
  • Any portion of your 2016 moving expense deduction allocable to 2017 -- It’s included in your 2017 gross income.

To learn more, see Publication 54: Tax Guide for U.S. Citizens and Resident Aliens Abroad at www.irs.gov.

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Calculators

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