Now that Trump’s tax reform is in effect, ex-pats — like the rest of us American citizens or resident aliens — can expect to see changes in their tax liability. Here’s a quick rundown of what you need to know.
Changes to Foreign Earned Income Rules?
- The maximum exclusion amount
- The elimination of Form 2555-EZ
What Is the Foreign Income Exclusion (FEIE)?
It’s a big tax break for workers who are paid by employers in countries other than the U.S. You can deduct all the money earned from this foreign-source from your U.S. income tax return, which means you could owe little or nothing in U.S. taxes. (Of course, you still have to pay income tax to the country of your employment.)
If you’re self-employed, you may qualify for the FEIE; however, you will still pay self-employment tax (social security and Medicare) calculated on the full amount you earned, before the FEIE is subtracted.
What’s the Maximum You Can Deduct?
For the 2019 tax year, you can exclude the first $105,900 of your foreign earned income from taxation. That’s an increase from $103,900 in 2018.
In addition, you may be entitled to:
- Exclude or deduct certain foreign housing amounts, such as rent, utilities, and repairs
- Exclude the value of meals and lodging provided to you by your employer
Who Can’t Claim the FEIE?
According to the IRS instructions, you cannot exclude income received from these sources:
- Pay received as a military or civilian employee of the U.S. Government or any of its agencies
- Pay for services conducted in international waters (not a foreign country)
- Pay in specific combat zones, as designated by an Executive Order from the President, that is excludable from income
- Payments received after the end of the tax year following the year in which the services that earned the income were performed
- The value of meals and lodging that are excluded from income because it was furnished for the convenience of the employer
- Pension or annuity payments, including social security benefits
How Do You Qualify for the FEIE?
You must establish that you are either a bona fide resident or have a physical presence in the country where you’re earning your income.
- Bonafide residence: You must have been living in a foreign country for a full calendar year
- Physical presence: You must have been in the foreign country for 330 days in a consecutive 12-month period — but you can designate which 12-month period
Insider tip: If you don’t quite meet these requirements prior to tax time, filing for an extension can help maximize your FEIE savings.
How Do You Claim the FEIE?
Fill out and attach Form 2555 to your U.S. income tax return.
With the end of the tax year drawing near, it’s time to make your tax-saving moves. Xendoo tax experts will be with you every step of the way, from business investment planning to file your return. Act now, and enjoy peace of mind all through tax season!