Should I take the foreign earned income exclusion?

The Foreign Earned Income Exclusion is generally best for taxpayers whose income is earned in a low- or no-income tax country. It will allow them to shield up to $107,600 (2020 figure) from U.S. taxation, while the Foreign Tax Credit would have little or no benefit since they are in a low- or no-income tax country.

What is foreign earned income exclusion 2020?

Limit on Excludable Amount For tax year 2020, the maximum foreign earned income exclusion is the lesser of the foreign income earned or $107,600 per qualifying person. For tax year 2021, the maximum exclusion is $108,700 per person. Together, they can exclude as much as $217,400 for the 2021 tax year.

How do you qualify for FEIE?

To be eligible for the foreign income exclusion, an expatriate must meet all four of the following requirements:

1. Must have foreign earned income.
2. Must have a tax home in a foreign country.
3. Meet either the bona fide residence test or physical presence test.
4. Make a valid election to exclude foreign earned income.

Can I change from foreign earned income exclusion to foreign tax credit?

If you take the Foreign Earned Income Exclusion one year and would like to switch to the Foreign Tax Credit the next year, you may do so, but you will have to wait 5 years before you can claim the Foreign Earned Income Exclusion again.

Do I have to pay U.S. taxes on foreign income?

Yes, U.S. citizens have to pay taxes on foreign income if they meet the filing thresholds, which are generally equivalent to the standard deduction for your filing status. You may wonder why U.S. citizens pay taxes on income earned abroad. U.S. taxes are based on citizenship, not country of residence.

Do I have to pay US taxes on foreign income?

What is the difference between foreign tax credit and foreign income exclusion?

The Foreign Earned Income Exclusion is only applicable to earned income, whereas the Foreign Tax Credit can be applied to both earned and unearned income. Earned income is defined as pay for personal services performed, such as salaries and wages, commissions, bonuses and self-employment income.

Does foreign income have to be reported?

Foreign or worldwide income is income earned anywhere in the world. The United States Internal Revenue service uses it to determine taxable income for US Citizens and resident aliens. All US Citizens and resident aliens must report their income earned anywhere in the world, even if they work and live outside the US.

What are the requirements for foreign income exclusion?

In order to be eligible for the foreign earned income exclusion, an expatriate must meet all four of the following requirements: Must have foreign earned income. Must have a tax home in a foreign country. Must meet either the bona fide residence test or physical presence test. Make a valid election to exclude foreign earned income.

What is maximum foreign income exclusion?

Citizens and residents living and working outside the U.S. may be entitled to a foreign earned income exclusion that reduces taxable income. For 2019, the maximum exclusion is $105,900 per taxpayer (future years indexed for inflation).

What is taxable foreign income?

Foreign-Source Income is generally the income realized from countries outside the country of residence of the taxpayer. Unlike many other countries, foreign-source income is taxable in the United States.

Is foreign income tax deductible?

Foreign taxes are deductible from your U.S. income tax return only if the foreign source has an international tax treaty with the United States. To avoid double taxation, a taxpayer has the option of taking the amount of any qualified foreign taxes paid or accrued during the year as a foreign tax credit or as an itemized deduction.