Foreign Earned Income Exclusion
A foreign earned income exclusion means that your income from a foreign source is not subject to U.S. taxation. These are earned income from wages and professional fees, but not amounts distributed from corporate profits. Foreign earned income does not include social security benefits and railroad retirement benefits, which are treated as social security. It also does not include any capital gains. The amount that is excluded from gross income depends on your specific circumstances. For example, if you are a Windsor resident and earn income from a Detroit business, you cannot deduct the amount from your earnings if you have earned the same amount in the same period in the same year.
To qualify for a foreign earned income exclusion, you must have lived in the foreign country for at least 330 days during the tax year. You do not have to have lived there consecutively. The foreign country you live in must be your primary or regular place of abode. In addition, you must have a bona fide residence in the country in which you made the foreign earned income. Whether you lived there for business or pleasure, you must meet certain requirements to qualify for the foreign earned income exclusion.
The Foreign Earned Income Exclusion is an important tax benefit that protects you from paying taxes on foreign earned income. This deduction reduces your U.S. tax liability by up to $112,000 in 2022. This is especially beneficial if you make a lot of money in a foreign country, such as Bulgaria. For the example, if you earn $150,000 in Bulgaria, the country tax rate is 10%. That means you would pay only $15,000 in taxes. The Foreign Earned Income Exclusion only applies to the first $112,000 of income. The remainder would be fully taxable, which could be reduced by the partial Foreign Tax Credit.
If you have a spouse who works in another country, both of you may qualify for the foreign earned income exclusion. The spouses must satisfy the same physical presence and bona fide residence tests. If both spouses meet these requirements, you can each choose a foreign earned income exclusion for the other spouse. This means you can exclude up to $183,000 of income from your income, which can be beneficial to both of you.
If you work abroad and earn an income that is taxed in your country, you may be eligible for the foreign earned income exclusion. The foreign earned income exclusion requires proof of your tax home abroad. The amount of housing costs you have in your foreign country is also exempt from tax. Typically, you must meet the bona fide residence test for your foreign income exclusion to be valid. However, you do not need to be a U.S. citizen to qualify for this deduction.
To be eligible for the FEIE, you must have 330 days of foreign residency in the last twelve months. During that time, you must have been a resident of the foreign country for at least one full year. However, you can overlap two 12-month periods if you want. It is important to pay attention to all of the details. It is important to track your time correctly and accurately. If you miss the deadline, you may miss the opportunity to claim the FEIE.