Foreign Earned Income Exclusions are available to certain U.S. taxpayers abroad as well as various deductions, exemptions, and credits. Our knowledgeable staff will assess your specific situation in order to take advantage of Foreign Earned Income Exclusions, Housing Exclusions, Housing Deductions, Moving Expense Deductions, Charitable Deductions, and IRA Contributions as well as a host of other deductions, exemptions, and credits allowed by the IRS.
Foreign Earned Income Exclusion - What Qualifies?
If you live and work abroad, you may qualify to exclude all or part of your foreign earned income. Foreign earned income is defined as pay, such as wages, salaries, and professional fees, for personal services performed in a foreign country during the time your tax home is in a foreign country and you meet either a bona fide residence test or a physical presence test. The place where you perform the services is what defines your income as foreign, not where or how you are paid. For instance, income received for personal services performed in France is foreign earned income, even if the employer is American and your pay is deposited in an American bank. Wages paid by the U.S. government to its employees are not eligible for the exclusion; however, amounts paid to independent contractors by the U.S. government may be eligible.
Usually, foreign earned income does not include such items as interest, dividends, pensions, annuities, or amounts attributable to certain employee trusts. If you are self-employed, and both capital investment and personal services are factors in producing your income, your earned income is the smaller of the value of your personal services or 30% of net profits. Additional rules are described in Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad. (NOTE: This links to a pdf file; see additional links listed below if you don't want to download a pdf file).
Your net self-employment income is generally subject to self-employment tax even if it is excluded for income tax purposes. However, if it was earned in a country that has a social security agreement with the United States, called a totalization agreement, it may be exempt from U.S. social security taxes, including the self-employment tax. The countries that have entered into this agreement are listed in Publication 54. If you violate U.S. restrictions that prohibit travel to certain countries, your foreign earned income from such a country does not qualify for exclusion. See Publication 54 for current travel restrictions. For more information, refer to Topics 853 and 854, or order Publication 54 by calling 1-800-829-3676.