If you’re living or working in a country outside of the United States, then you might be paying foreign taxes. There are some taxes, like foreign property taxes, that you’ll probably have to pay in conjunction with your United States federal income tax.
The Foreign Earned Income Exclusion (FEIE) is a U.S. tax law that ensures that qualifying U.S. citizens and residents can reduce the amount they owe in federal taxes to the IRS on the income they earn while living in another country. It provides tax benefits for individuals and married couples, so find out when it applies and how to take advantage of the exclusion when it comes time to file your own taxes.
Understanding How to Qualify for FEIE
First, it is important to understand who is eligible for the exclusion. There are two terms to familiarize yourself with:
- Bona fide residence test – an individual must reside in a foreign country for an uninterrupted period of time that includes the entire tax year, or
- Physical presence test – an individual must be physically present in a foreign country for 330 full days during a time period of 12 consecutive months that begins or ends in the tax year.
According to the Internal Revenue Service (IRS), in order to qualify for FEIE, your tax home must be in a foreign country and you must be one of the following:
- A U.S. citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year,
- A U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year, or
- A U.S. citizen or a U.S. resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.
Getting Relief on Federal Tax Liability
While you are taxed on your total income regardless of where you live, FEIE allows you to exclude some of this income up to a certain amount of earning. This amount is adjusted each year for inflation and the 2018 allowance is $104,100.
If you qualified for FEIE, the first $104,100 of the income you earn while living abroad can be excluded from your U.S. Federal tax return. Married couples can double the exemption as long as both individuals qualify for the FEIE.
This earned, or “active” income are the wages you work toward earning. However, “passive” income, or any money you earn from stock trading, pensions, IRAs, real estate transactions, etc., fall outside of the FEIE regulation.
It makes sense to pay taxes in a foreign country where you’re living, driving on roads, and otherwise using the infrastructure. But, as long as you are a U.S. citizen or a green card holder, you have to pay Uncle Sam as well. Fortunately, the FEIE provides qualifying individuals some form of tax relief.
Foreign Housing Exclusion
In addition to the Foreign Earned Income Exclusion, you’ll want to see if you qualify for the Foreign Housing Exclusion. If you qualify under the bona fide residence or physical presence test as described above, you can exclude part of your housing payments made in your foreign tax home as long as they are considered paid for with your taxable earned income.
The IRS further explains, “Your housing amount is the total of your housing expenses for the year minus the base housing amount. The computation of the base housing amount (line 32 of Form 2555) is tied to the maximum foreign earned income exclusion. The amount is 16% of the maximum exclusion amount (computed on a daily basis), multiplied by the number of days in your qualifying period that fall within your tax year.”
There are limitations placed on what can and cannot be included as part of housing expenses as well as how much can be excluded which is based on which foreign country you paid housing expenses in. The worksheet for computing and reporting this information is a part of the IRS Form 2555.
Other Applicable Foreign and Domestic Taxes
It’s important to note the FEIE only applies to federal income taxes. It has no bearing on your state and local tax liabilities. You will need to use Form 2555 or Form 2555-EZ to claim your exclusion. This form should be attached to your appropriate 1040 form when your taxes are filed.
The Foreign Earned Income Exclusion also has no impact on your tax responsibility to the foreign country in which you are living. For example, local property taxes or stamp duty taxes play no role in FEIE.
The future of FEIE and other tax laws could change, and soon so keep abreast of these changes to make sure you comply with the tax laws.
Belize Tax Advantages and FEIE
As a U.S. citizen or green card holder, paying taxes is part of life. However, understanding the tax code can help you to save money and avoid jail time. Look for guidance from trusted tax and financial advisors to assist you in legally retaining as much of your hard-earned income as possible.
When considering your foreign tax home, be sure to have Belize on your list. In addition to offering a beautiful place to live, Belize also provides tax advantages to foreign residents and expats. You may also take advantage of FEIE, Foreign Tax Credits, and other tax relief solutions.
Caye International Bank, on Ambergris Caye island in Belize, is known for its ethical behavior and business integrity and has been helping U.S. citizens establish the right types of offshore accounts for years. One of the experts at Caye can help you learn more about banking, finance, taxation, necessary tax forms, and more as part of living and earning income in Belize.
Contact Caye International Bank today to get the answers to your questions.