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Reducing Taxes with the Foreign Earned Income Exclusion (Form 2555)

Reducing Taxes with the Foreign Earned Income Exclusion (Form 2555)

Reducing Taxes with the Foreign Earned Income Exclusion (Form 2555)

If you are a U.S. citizen or a resident alien of the United States and you live abroad, you are taxed on your worldwide income and as such must file a U.S. return (Form 1040NR) for all the years that you are residing abroad. However, as a U.S. expat you may qualify to reduce your U.S. taxable income up to an amount of your foreign earnings that is adjusted annually for inflation ($100,800 for tax year 2015). In addition, you can exclude or deduct certain foreign housing amounts. Together his is known as the foreign earned income exclusion.

If you meet certain requirements, you may qualify for the foreign earned income exclusion which can reduce or even eliminate your taxable earned income. The necessary steps to qualify for the exclusion are summarized below, however qualification is based on a thorough analysis and determination based on the facts of the individual taxpayer’s situation.

Foreign Earned Income Exclusion Requirements

In order to be eligible for the foreign earned income exclusion, an expatriate must meet all three of the following requirements:

Foreign Earned Income

Foreign “Earned” income includes salaries, wages, commissions, bonuses and self-employment income.  In addition, the income must be “foreign” earned meaning that the services were performed in a foreign country.

It does not include:

  • Non-earned income or passive income such as investment income (interest, dividends and capital gains) and social security income
  • Income earned as an employee of the U.S. government
  • Income for services performed in international waters
  • Self-employment taxes; while you can exclude your self-employment income, your self-employment income is subject to self-employment taxes (Social Security and Medicare taxes), unless the services were performed in a country that has a Totalization Agreement with the United States.

 

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