I paid taxes on my income in China of around 13000. You must pay self-employment tax on all your net profit, including any amount excluded from income. The 34,000 $ would be before any deductions, and before either the FEIE or the FTC is taken into account. I have a rental property in Germany, pay income there and report the income on my us tax return and thus get a foreign tax credit. Foreign Earned Income Exclusion: The Foreign Earned Income Exclusion operates completely differently. This doesnt seem right to me since I thought I should use the FTC to cover those unearned amounts. Thank you so much David ! I am also planning to move to Dubai in 1 year with roughly the same income and there are no income taxes there. I hope you can answer mine. Since you are excluding $108,700 of your $150,000 gross receipts, you will need to multiply that same ratio by the expenses that are directly related to your Schedule C gross receipts, as follows: But her income is higher than the U.S. Standard deduction. Individual Income Tax Return About Form 8801, Credit for Prior Year Minimum Tax - Individuals, Estates, and Trusts You can use the FTC for amounts above the FEIE. Your tax home is the general area of your main place of business, employment, or post of duty, regardless of where you maintain your family home. Foreign earned income exclusion. It can be offset by the taxes you pay in Germany using the FTC on your US return. If someones income is below the standard deduction, they may not need to use the FEIE to reduce their US liability. Thank you again for the advice and information! Further, the test is not met if the taxpayer declares to the foreign government that they are not a tax resident of that country. Be careful if you decide not to take the FEIE. Additionally any income excluded by the FEIE is ineligible for Roth contributions. The term "foreign country" does not include international waters or airspace, nor does it include offshore installations that are located outside the territorial waters of any foreign country. Is this regarded foreign income? Have other payments, such as an amount paid with a request for an extension to file or excess social security tax withheld. The number of schedule 1, line 8 will be negative and the number on schedule 1, line 3 will be positive. You placed your car in storage. You could use the Foreign Earned Income Exclusion to shield the first $112,000 (2022 figure) from U.S. taxation. Form 114 (FBAR) and Form 8938 are other common forms that may be required. Your abode is in the foreign country for the time you live there, and you satisfy the tax home test in the foreign country. As you would guess, each has its own benefits and drawbacksso which one is better? Im not sure but I think my tax liability in the US if I use the FTC would be around $10000. I stuck with the FEIE for 2020 tax returns and removed the over contribution to the Roth. The deduction allowed for foreign-derived intangible income and global intangible low-taxed income. The tax must be the legal and actual foreign tax liability. The term "foreign country" does not include U.S. territories such as Puerto Rico, Guam, the Commonwealth of the Northern Mariana Islands, the U.S. Virgin Islands, or American Samoa. She only makes $55,000/year. Hello David, Also can I take the FTC for unearned income (like interest income) while using the FEIE on earned income? I have two questions. The exclusion is an election. Applying the FTC on top of the FEIE, does it have to be apportioned by income, or can it be apportioned by income tax? Liz, As a dual citizen you likely should file a US tax return even if it results in zero tax being due. You would not qualify under the bona fide residence test. Just to throw another consideration out there: an expat with dependents can file under the head of household status without having to include their spouses income. You previously mentioned in another persons question that in order to contribute to Roth IRA income would have to exceed FEIE so Im just wondering if this is at all applicable to my situation. Thanks! In most cases, it is to your advantage to take foreign income taxes as a tax credit. Self-employed individuals have an extra step in that they need to submit evidence that they are subject to another countrys social security system so they wont be subject to self-employment taxes on their US return. Your email address will not be published. That being said, there are a lot of financial advisors and CPAs that specialize in the US / Canadian relationship. I have a very specific question you might be able to help me with. Im asking because I always use TurboTax to file, and it seems to not allow this option Im not sure if its a limitation with the software or simply not allowed. Thank you in advance. Can I Take Both the Foreign Earned Income Exclusion and the Foreign Tax Credit? Its possible that switching to the FTC could result in a refund of $1,400 per child versus using the FEIE. Someone deciding whether to switch should also weight the fact that they wont be able to return to the FEIE again for 5 years without requesting an IRS exception. A taxpayer can always switch from the FEIE to the FTC, but they may not be able to switch back without requesting IRS approval or waiting 5 years. The location of your tax home often depends on whether your assignment is temporary or indefinite. That would likely make sense if they are moving from the UK to the UAE. I have two children too, so read about that credit only being possible if you use FTC option. Use Form 2555 to claim the Foreign Earned-Income Exclusion (FEIE), which allows those who qualify to exclude some or all of their foreign-earned income from their U.S. taxes. A conversion will not generate excise penalties. It is a tax that was introduced in 2018 by the IRS on a foreign companys net profits, when the company is based outside of the US, but owned by a US citizen. But there are things you can do to reduce your tax burden related to foreign earned income. Not all foreign taxes qualify. Thanks. Hopefully that is a simple question to answer! You may also have a gain or loss to report because of currency conversions. Im just trying to determine which is the best path to take CONSIDERING possibly opening a Roth IRA. Page Last Reviewed or Updated: 27-Jul-2022, Request for Taxpayer Identification Number (TIN) and Certification, Employers engaged in a trade or business who pay compensation, Electronic Federal Tax Payment System (EFTPS), Treasury Inspector General for Tax Administration, Foreign Earned Income Exclusion - Tax Home in Foreign Country. Hello David, One thing to note is that if you amend your old returns and switch to the FTC you wont be able to claim the FEIE again for 5 years. Thanks! Not sure if there are others but these are definitely worth mention as they are not well known and may impact taking one vs the other. Do I sum the numbers? I know she cant contribute to her IRA if she uses the exclusion but we dont really see all the advantages of using the credit approach. Can I use the FEIE on my salary and then apply the FTC to foreign unemployment benefits from Finland? She is being taxed at between 20-25% of her income. Im currently living in Florida and run my own translation + graphic design business from home. Am I correct in that I would be able to contribute to Roth IRA if my AGI is 0-10,000 $ as Married Filing Separately (My husband is Austrian citizen and at this time I dont think it would be beneficial to file MFJ) I am struggling to understand the AGI, but if all my foreign income is excluded, wouldnt my AGI be 0? Thanks in advance for any advice. I pay a reduced tax bracket due to special expat tax status of 27.5%. My understanding is if i dont exclude my income then this would be possible. If the IRS is unaware of it for now, and I move my contributions to a non-retirement account, would that solve the problem? Any help would be gratefully appreciated. Foreign Tax Credit vs. Foreign Earned Income Exclusion For purposes of the foreign earned income exclusion, the foreign housing exclusion, and the foreign housing deduction, the terms "foreign," "abroad," and "overseas" refer to areas outside the United States, American Samoa, Guam, the Commonwealth of the Northern Mariana Islands, Puerto Rico, the U.S. Virgin Islands, and the Antarctic region. How will I be taxed? I hope you are doing well. Beautiful information that was clearly and concisely explained. Housing expenses do not include expenses that are lavish or extravagant under the circumstances, the cost of buying property, purchased furniture or accessories, and improvements and other expenses that increase the value or appreciably prolong the life of your property. Someone can simply pick it up again when they start working. Example 2: Instead of the Cayman Islands, lets say that your 3-year assignment placed you in Bulgaria, a low income tax country with flat 10% rate. I believe that if I claim the US Standard Deduction, I DONT need to file either the FEIE or the FTC, correct? No you can only use both if your income exceeds the FEIE and youre using the FTC on the remainder. Am I missing something? I will include this on my 1040, but do I have to use form 1116 also? If you didnt qualify for the FEIE in year 2, but then do again in year 3 there is no issue. This is super helpful, thank you! Currently in Michigan. Since she is a dual citizen she would have filed a 2019 US tax return as well. Do I need to still file Form 2555 to keep the election invoked for future years? Does a buyout package from a company count as income that be excluded in the FEIE? You are subject to tax on worldwide income from all sources and must report all taxable income and pay taxes according to the Internal Revenue Code. [1][2] For 2021, the maximum exclusion is $108,700 per taxpayer (future years indexed for inflation). For example, it is possible to have a gain in yen on the sale because the property increased in value in Japan, but because the yen depreciated against the US dollar during that time the transaction is a loss in US dollar terms, or vice versa. Do you have to prove you paid foreign income tax to claim the foreign earned income exclusion? The location of your abode often will depend on where you maintain your economic, family, and personal ties. Does the time start from the amended 2018 tax year (so could elect again starting for tax year 2023) or from the year of the amendment (so one could elect again starting for the tax year 2026)? You may not need the FEIE if your income is below standard deduction for MFS. I have lived in the UK for many years, have no intention of returning to the USA to reside anytime soon (if that matters.). It does not mean your principal place of business. Unfortunately there is no statute of limitations for excess Roth contributions. I am considering purchasing an investment rental property overseas. Im wondering if it is worth amending my past tax returns (up to 3 years, I believe?) The maximum exclusion is $108,700 for tax year 2021 (future years indexed for inflation). Where income relates to services both in the U.S. and outside the U.S., the income must be apportioned. The form must be attached to a timely filed U.S. Foreign tax credit. Which is Right for Me, the Foreign Tax Credit or the Foreign Earned Income Exclusion? The IRS makes it clear in Publication 54 that each day can be in more than one 12-month period. I am attempting to do our taxes for the US and filing jointly. You should also be aware that switching from the FEIE to the FTC could stop you from being allowed to claim the FEIE for the next 5 years. Someone that has extensive ties to a non-US country would be a good candidate for the FEIE using the bona fide residence test. Context: However, taxpayers with foreign source income have two major options to help avoid double taxation: the Foreign Earned Income Exclusion and the Foreign Tax Credit. Im also wondering if I were to file a FEIE, and that asks me to put the FEI onto my Schedule 1 line 8 how does that work with filling out a Schedule C, showing my business net profit which Schedule 1 asks for on line 3? For this purpose, foreign earned income is income you receive for services you perform in a foreign country in a period during which your tax home is in a foreign country and you meet either the bona fide Someone wont be locked into the FEIE, but they could get themselves locked out. It would have meant only a couple hundred dollars in Federal taxes. You can apply the FTC to a foreign capital gain, so that may provide some relief. Is it better for her to complete the Income Tax Credit. You cant make a Roth IRA contribution if your modified AGI is $10,000 or more.. Foreign Earned Income Exclusion Vs Foreign Tax Credit. Or does the FTC not apply toward a 401K withdrawal? Browsed the many comments and a few things came up that you should probably highlight in the article for the benefits of taking the FTC vs the exemption. However, if they file married filing separate they would be above the $10,000 threshold for Roth contributions. My daughter is working for the next two year at a university in Scotland. My husband has worked in Iraq and take the FEIE. Information about Form 1116, Foreign Tax Credit (Individual, Estate, or Trust), including recent updates, related forms, and instructions on how to file. IRS Website says this Your filing status is married filing separately, you lived with your spouse at any time during the year, and your modified AGI is more than zero. I claimed the foreign income tax exclusion for the 2019 tax return already. The tax must be an income tax (or a tax in lieu of an income tax). You wouldnt owe any taxes anyway and could make a Roth contribution as long as your modified AGI is less than $10,000. Seems like at this point (Im only 25), I can put that money in a regular mutual fund for the time being and it would be better despite the clear benefits of Roth. While she visited me in 2020 on a B1/B2 visa, she visits me now on the recently obtained H4 Dependent visa as she transitions to the US. Should you use the Foreign Earned Income Exclusion or the Foreign Tax Credit? The foreign earned income exclusion, the foreign housing exclusion, and the foreign housing deduction are based on foreign earned income. and if not what would be the best way to do this given my circumstances? Well, it depends on the details of the taxpayers unique situation! It was put in place in order to dissuade companies from moving their companys assets outside the US to a country abroad with a Question is; with my 2021 foreign salary continuing to fully exempt (since it will be below the threshold). One question, am I able to file FEIE for my salary earned income and separately, file for foreign tax credits for rental income on a foreign rental property? Shortly after moving, you leased a car, and you and your spouse got driving licenses in the foreign country. Youll receive a Foreign Tax Credit for the amount paid in Spain and because the tax rate is higher than in your U.S., it will reduce your U.S. taxes on your foreign earned income to zero. I have a non-US person spouse who does not work. Hi David, my questions is in regards to carry over foreign tax credit that I was not able to apply to far to us taxes owed. This is a common question that expats are asking these days! _____ 4. If you do take a credit or deduction for any of those taxes, your choice to exclude housing amounts may be considered revoked. The Foreign Tax Credit is a dollar-for-dollar reduction in a taxpayers U.S. income tax liability for qualifying foreign income taxes paid. You can file for a foreign tax credit to offset any potential double taxation. He paid in 12,000 in Iraq taxes. Can claim any credit that you didn't claim on Form 1040 or 1040-SR, such as the foreign tax credit, education credits, general business credit. What is the Difference Between the Foreign Tax Credit and the Foreign Earned Income Exclusion? Thanks again! The tests, the exclusions, and the deduction are explained in Foreign Earned Income Exclusion. Although called an exclusion for historical reasons, since the 2006 tax year it is better described as a credit equal to the amount of tax that would have been owed on the eligible foreign income, without considering any deductions or exemptions. If you are temporarily absent from your tax home in the United States on business, you do not qualify for the foreign earned income exclusion. Also, just to clarify if you know if the income in Austria IS taxed, I believe it comes out automatically month to month, instead of having to pay it at the end of the year. Thank you! Thank you for your informative post. To pass the physical presence test in order to claim the FEIE there is no requirement that someone be a tax resident in another country. It sounds like youre doing your return by hand, which is not recommended. If I switch to the FTC, no matter the potential tax repercussions, is it possible to contribute to my old Roth IRA? I m new to USA and will appreciate your help. None of us work or own any asset as yet in USA. from self Employment in Ireland and was advised to pay my estimated SE taxes on this to US which I did in 2020. The answer is yes, an expat with kids may want to consider using the FTC over the FEIE so that they can obtain the refundable child tax credit. You are in business abroad as a consultant and qualify for the foreign earned income exclusion. Year 1, worked and lived fully in South Korea, utilized the FEIC. Not only you, but potentially your family, dog, cat, ferret, and possessions must physically leave the U.S. for a certain period of time. I just stumbled on it on the internet. In most cases, choosing the FTC will reduce your U.S. tax liability the most. Under Example 4, it assumes the income tax is flat. I file as Head of Household since my spouse is not a US citizen. The exclusion is limited to income earned by a taxpayer for performance of services outside the U.S. "26 U.S. Code 911 - Citizens or residents of the United States living abroad U.S. Code", IRS Publication 54, Chapter 4: Foreign Earned Income and Housing: Exclusion Deduction, Foreign Earned Income Exclusion Form 2555, IRS Chief Counsel Advisory CCA-11281523-12, https://en.wikipedia.org/w/index.php?title=Foreign_earned_income_exclusion&oldid=1061672595, Creative Commons Attribution-ShareAlike License 3.0, This page was last edited on 23 December 2021, at 04:45. Many thanks for your time! If an American moves abroad, he or she can exclude foreign-earned income up to $112,000 as of 2022 from U.S. taxation. Thank you! It is my understanding that she would need to have the ITIN before you could file, so you may wish to request an extension. It seems that Vanguard should have let me know that I wasnt allowed to make contributions while living abroad. In general if someone lives in country with a higher tax rate than the US, they may be better off using the FTC. I would expect that she should continue to in the same manor as previous years even though youre now married. Thanks. If someone uses the FEIE they can claim the child tax credit, but not the additional (refundable) portion. The term "foreign country" includes the seabed and subsoil of those submarine areas adjacent to the territorial waters of a foreign country and over which the foreign country has exclusive rights under international law to explore and exploit the natural resources. standard deduction amount of $12.4K uniquely to my U.S. income? If the buyout package is wages or a bonus it will be excludable under the FEIE. Hi David, I live in Denmark. IRS regulations allow the election with late-filed returns in some cases. Thank You! I think I may I have to look at doing something different other than an IRA. You must attach Form 2555, Foreign Earned Income, to your Form 1040 or 1040X to claim the foreign earned income exclusion, the foreign housing exclusion or the foreign housing deduction. Distributions from US retirement accounts are likely US source income and should not be included on Form 1116. My income is about $205,000 annually and I am a UK tax resident paying taxes here. Additionally, foreign housing expenses may not exceed your total foreign earned income for the taxable year. How does FTC apply with regards to income from a rental property? Please refer to the Instructions for Form 2555 and chapter 4 of Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad. I was unable to travel back to the US at all from Jan 2020 until Dec 2021. Income reported on Form 1116 should be separated by country and type of income. to claim this credit or just leave it! Excluded as foreign earned income (including any housing exclusion) on Form 2555, line 43, even if you choose not to include it in earned income for the earned income credit (EIC) or the exclusion or deduction for child and dependent care (foreign tax credit) and line 6l (Form 8978, line 14) 3. If it is not flat, can the effective tax rate of the income above the FEIE threshold be used instead of taking the % as you did? Thanks. Be sure to look into any required FBAR and Form 8938 filing obligations as well. The limit on housing expenses is computed using the worksheet on page 3 of the Instructions for Form 2555. Caution: If you didnt complete the 2021 Qualified Dividends and Capital Gain Tax Worksheet, the 2021 Schedule D Tax Worksheet, or Part V of the 2021 Schedule D (Form 1041), see the instructions Do I need to maintain a residency in the US in order to do this? If you meet certain requirements, you may qualify for the foreign earned income exclusion, the foreign housing exclusion, and/or the foreign housing deduction.To claim these benefits, you must have foreign earned income, your tax home must be in a foreign country, and you must be one of the following:. Beware! If you pay taxes in Germany on the 401(k) withdrawal, youll be able to claim the FTC to ensure youre not taxed twice. I am very curious about this since the new stimulus package increases the child tax credit and provides for the entire amount to be refundable. Im a US citizen currently living in Canada. I am living and working in Austria and am trying to determine my filing status while at the same time trying to open up a Roth IRA in US. It is also based on the number of qualifying days, and is limited to a specific dollar amount based on the location of housing.[4]. As we pay more taxes in Canada, paid taxes more than offset any U.S. tax due on said income, and therefore I would prefer to use the standard deduction uniquely against my U.S. income? Rental income on your German property is taxable in the US. They must be taxes paid on income or profit (with some exclusions, see below). Thanks so much for any help you can provide! https://www.irs.gov/individuals/international-taxpayers/self-employment-tax-for-businesses-abroad. A foreign country usually is any territory (including the air space and territorial waters) under the sovereignty of a government other than that of the United States. Should I change from filing a Foreign Income Tax Exclusion to filing a Foreign Tax Credit (and therefore be eligible for Child Tax Credits for my 3 dependents with SSNs)? I earn less than the FEIE limit, but would like to use the FTC for a portion of the income in order to contribute to my existing Roth IRA. Thanks1. The Foreign Earned Income Exclusion is generally best for taxpayers whose income is earned in a low- or no-income tax country. The decision to make Roth IRA contributions is impossible to advise on without being in a financial planning relationship because it is a long-term decision. If any of the foreign earned income received this tax year was A U.S. citizen who is a bona fide resident of a foreign The U.S. taxes its citizens and permanent residents on their worldwide income. Youve likely fully depreciated the property if you have held it for 37 years, but youll only have foreign tax credits from the last 10 years to offset the recapture. However, these factors can contribute to you having an abode in the United States. This means that foreign real estate, social security, and property taxes do not qualify for the credit, because they are not a tax that is imposed on income. Although the foreign housing exclusion and/or deduction will reduce your regular income tax, they will not reduce your self-employment tax. I got married in September 2020, my spouse is of a foreign country that has a tax treaty with the US. If no non-US income taxes are paid, there is no opportunity to use the Foreign Tax Credit. Thank you I had the exact issue. Thats why some people choose to use the FTC instead. Wages/salary is general category income and shouldnt be mixed with passive category income like interest and dividends that may be subject to foreign taxes and also reported on Form 1116. Enter on lines 19 through 23 all income, including noncash income, you earned and actually or constructively received during your 2022 tax year for services you performed in a foreign country. We wanted to avoid the FEIE because she hoped to visit her relative in the U.S. for a few months (with intention to return to her home in Germany). Absolutely. The housing deduction applies only to amounts paid for with self-employment earnings. In other words, would the statutes of limitations protect you once 6 years has passed if you were never notified by the IRS about your contributions? To obtain the refundable portion of the CTC you need to have a positive AGI. I thought about forgoing the FEIE and use the FTC to start the ROTH. Foreign tax credit eligibility. Someone can apply the FEIE towards their earned income and then use the FTC to offset taxes on their passive income. example Robb and his wife are U.S. citizens who reside in France. Income from U.S. The exclusion is available only for wages or self-employment income earned for services performed outside the U.S. 1. I earn about 95000 a year with 2 dependents. To qualify they must meet one of two tests: the Physical Presence Test or the Bona Fide Residence Test. Is this possible or can I only use both if I make more than the FEIE limit (and use the FTC on the remainder?) You are able to amend your return, revoke the FEIE, and switch to the foreign tax credit. Youll need to request the evidence from the UK Government. What is GILTI Tax? Thank you for that. 54 . It allows you to take the portion of your income (up to $112,000 in 2022) that was foreign earned and subtract it from your reported income. Do I have to be tax resident in a country in order to take advantage of FEIE? Counting the days for the physical presence test requires a determination for each day separately. Many thanks for your help! For your 2022 tax filing, the maximum exclusion is $112,000 of foreign earned income. Yes? Because I had it more than 10 years there will be NO German tax on the proceeds. This has been very helpful and I understand it a bit better. The exclusion is then reduced by half of self-employment tax. Your abode is not necessarily in the United States merely because you maintain a dwelling in the United States, whether or not your spouse or dependents use the dwelling. Any clarification would be greatly appreciated! Your foreign earned income is $95,000, your business deductions total $27,000, and your net profit is $68,000. Thank you so much David for getting back to me-I really appreciate it! Remember, this is NOT a full exemption from all tax responsibilities. The exclusion is claimed on IRS Form 2555. Only individuals are eligible for the exclusion. I have other amounts to report on this line that are foreign unearned income. Hi David, I invoked the foreign income exclusion last year, but this year I have negative self employment income (self-employment loss). A self-employed person (or sole trader) would need to file a Schedule C regardless of their liability. The United States taxes citizens and residents on their worldwide income. One bit of ambiguity around changing the FEIE election. One thing to note is that the standard deduction is set to be cut in half when the Tax Cuts and Jobs Act expires in 2025 unless Congress extends it or makes other changes. This is more like telling Uncle Sam Income? Do not submit Form 2555 by itself. Thanks for your post. Assuming one can amend, when does the 5-year period start and one can re-elect the FEIC? Would I need to change my address or can I keep my US address for work, banks, and such, so that I can claim FEIE or FTC? She began working as an apprentice. I thought it would be 15% for my income bracket based on my research, but now Im unsure! In the example above youll receive no benefit from the Foreign Tax Credit, because you arent paying any foreign income taxes in the Cayman Islands. The country of purchase is Japan, by the way. Year 2, worked and lived in US , did not utilize the FEIC. It will allow them to shield up to $112,000 (2022 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. She does not know whether shell be back in the US permanently and I guess that is important with regard to withdrawal as any IRA withdrawal income (Roth or traditional) will be a taxable event with regard to Germany. Many people work in countries with no income tax and can still claim the exclusion. Is the rental income also considered taxable income in the US and can it be excluded using the FTC? For purposes of the foreign earned income exclusion, the foreign housing exclusion, and the foreign housing deduction, the terms "foreign," "abroad," and "overseas" refer to areas outside the United States, American Samoa, Guam, the Commonwealth of the Northern Mariana Islands, Puerto Rico, the U.S. Virgin Islands, and the Antarctic region. I dont want to get locked onto the FEIE if next year it makes more sense to just take the FTC to get a refund for the child tax credit. Echoing what others have written: thanks for the clear, concise information. But then realized given I still have a Virginia residency, the state taxes would be several thousand dollars! Its a little confusing, unless Im reporting amounts on the wrong lines. I confirmed this on the phone with the IRS today but please correct me if Ive misunderstood! David, An official website of the United States Government. And can I use my carry over foreign tax credit to pay this US tax? You joined a local business league, and both you and your spouse became active in the neighborhood civic association and worked with a local charity. It also means having to apply for the FEIE if she wishes to use that in the next 5 years, as she plans to remain in Germany for some time and has a full time job there lined up after graduation. She has lived and worked her entire Adult life in Canada although she is a dual citizen of the US. Is it possible to declare a portion of my salary under FEIE and the remaining that would go towards the roth IRA under FTC? Traditional IRA contribution may or may not (probably not) make sense in that scenario based on Australian taxation and long-term residency plans. An exclusion from income means that you won't have to pay income tax on the benefit you're receiving, but you also won't be able to use that same tax-free benefit for a deduction or credit. The difficulty comes from the fact that those two amounts likely wont match because of exchange rates and the requirement to take depreciation of the property on your US return. Any guidance would be appreciated! How can I figure out how much US capital gains tax I will need to pay? I pay tax every year in the UK, but dont ever earn that much. Would it make sense to file the FTC instead. The location of your abode is based on where you maintain your family, economic, and personal ties. Yvonne. By the time youre calculating your tax, its almost as if you had not earned that income at all. The amount of exclusion that a taxpayer is entitled to is equal to the lesser of foreign earned income for the year or the maximum exclusion, divided by the total number of days (365 or 366) in the year times the number of "qualifying days". I am wondering one thing I am a dual UK/US citizen, living in the UK. Youll pay your German taxes and then use the FTC or FEIE on your US return to reduce your US taxes. Foreign Earned Income Exclusion: This, on the other hand, has a very high bar. You are correct. Ive never used the foreign housing exclusion before, but it might actually help me this year, so Ill also look into it. Do I need to still file the 2555 with 0 income to keep it invoked for future years? I expect that her income in the near future will be within the FEIE limits, and with Germany as a high tax state, the FTC may be a better option for her for now as she has some US sourced unearned income as well ($10000 or so). Many thanks for your help. I always submit the FEII, but this year have taxable capital gains of $1000. For example, although I work and have income that can be excluded since it doesnt exceed $107K I also have US capital gains income that is taxed here in Europe. **Year 3, working and living fully in South Korea again can I still utilize the FEIC?**. Although it would be extremely expensive, is it better to go back and amend all the tax returns since the year I first made a contribution to my Roth? The foreignhousing exclusion applies only to amounts considered paid for with employer-provided amounts, which includes any amounts paid to you or paid or incurred on your behalf by your employer that are taxable foreign earned income to you for the year (without regard to the foreign earned income exclusion). Territories My wife and I are both working abroad and qualify for the FEIE and/or FTC. That is how youll report the income, but then take an exclusion for the income. Taxpayers who claimed 911 in prior years until 2012 and back to US in 2013. Im unsure which return to file first. You correctly point out that there is a mismatch though. Bona Fide Resident for Part of a Year None of your foreign income will be tax-free. The FEIE reduces your AGI, while the FTC does not. Do you have foreign income on which you paid foreign taxes? Taxes paid to other countries qualify for the FTC when: If you expect your employment to last for 1 year or less, but at some later date you expect it to last longer than 1 year, it is temporary (in the absence of facts and circumstances indicating otherwise) until your expectation changes. However, I do need to file form 1040 Schedule C, Form 8833 AND include evidence that my tax is paid here in the UK (which I need to request from the UK government). As you mentioned it also has the added benefit of still having the option to make IRA contributions. My employer has no physical presence outside the US and there are no issues regarding my ability to perform the job remotely (web dev), but I would like to know if there could be any tax implications for my employer. However, the minimum time requirement can be waived if you must leave a foreign country because of war, civil unrest, or similar adverse conditions in that country. If you choose the foreign housing exclusion, you must figure it before figuring your foreign earned income exclusion and cannot claim less than the full amount of housing exclusion to which you are entitled. She would like to open a Roth IRA but that means taking a FTC rather than the FEIE. Youre correct to point out Form 8833 and a statement from the UK indicating that youre paying into their Social Security equivalent program, that way the income wont be subject to self-employment tax (Social Security and Medicare tax) in the US. The FEIE reduces your AGI, but excluded income is added back in for your modified AGI. Thanks. To qualify for the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, your tax home must be in a foreign country throughout your period of bona fide residence or physical presence abroad. The low threshold is to stop high earning couples from filing separately just to qualify for benefits. Hi if you made contributions to your Roth IRA in a brokerage account like Vanguard, while living abroad for over 10 years, and have been taking the FEIE when filing your income taxes (without knowing that you were not allowed to contribute to your Roth IRA), can the IRS penalize you the 6% tax penalty on every year your money has been sitting in your Roth IRA account after 6 years? However, if you take the foreign earned income exclusion your foreign tax credit or deduction will be reduced. Or can I just not file it for the years that Im unemployed and then file it again in future years when Im employed? It is a decision that shouldnt be taken lightly and you should work to review the long-term positives and negatives of such a decision. Having a "tax home" in a given location does not necessarily mean that the given location is your residence or domicile for tax purposes. I thought that the FEIE means that you cant take the child tax credit at all, but Intuit is allowing the child tax credit and the FEIE (but is not making any excess child tax credit refundable). One tax break for expatriates is the Foreign Earned Income Exclusion. Complete Part III only if you are required to do so by line 11 or by the Foreign Earned Income Tax Worksheet in the instructions. If your foreign work assignment is for an indefinite period and your abode is not in the United States, your tax home is in a foreign country. I suspect in 2023, but Im uncertain. Taken as a credit, foreign income taxes reduce your U.S. tax liability. In Germany its taxed as regular income (net of expenses). I have question about the Foreign Earned Income Exclusion (FEIC). I know it doesnt matter at this point, but I had no idea this was not allowed and was not notified by either the IRS or Vanguard. The "housing exclusion" is the amount of housing expenses in excess of 16% of the exclusion limit, computed on a daily basis. Required fields are marked *. I recommend reviewing their website for more details: https://www.irs.gov/individuals/international-taxpayers/revoking-your-choice-to-exclude-foreign-earned-income. Simply that they spend sufficient time outside the US. Its like Uncle Sam saying You owe me $10,000 for taxes on that income and you respond I already paid Queen Elizabeth $10,000 for taxes on that income, take your complaint up with her!. Foreign Tax Credit: This has a very low bar. 2. I dont think youre missing anything. This time you would be eligible for a Foreign Tax Credit because you are paying income taxes in Bulgaria. There is no need to file a blank Form 2555 if you do not have income. The next $38,000 would be fully taxable, but you could reduce your liability by taking a partial Foreign Tax Credit. Just seems like the options are very limited, for someone in my particular circumstances. You also cannot include in housing expenses the value of meals, nor can you include the value of employer-provided lodging not included in your gross income. Because of my sons education we are still residing in England but have visited USA on our green card. In addition, the taxpayer must meet either of two tests: The bona fide residence test is not available to a resident alien, unless he/she is a citizen or national of a country with which the United States has an income tax treaty in effect. You kept ownership of your home in the United States but rented it to another family. About Bright!Tax; Expats can claim both the Foreign Tax Credit and the Foreign Earned Income Exclusion, but they cant apply them to the same income. Many thanks. See Publication 514, Foreign Tax Credit for Individuals, for more information. Ive been checking the information and want to be compliant but like to know which option is best for me so I dont end up paying double taxes. saw your earlier answer on no FEIE on roth contribution. You and your spouse opened bank accounts with a bank in the foreign country. I suspect yes based on what I read. You may be paying property taxes, sales taxes, and numerous other taxes in the Cayman Islands, but none of them would qualify for the Foreign Tax Credit and allow you to reduce your U.S. tax. Hi David great site! However, the Foreign Tax Credit is likely to be less beneficial than the Foreign Earned Income Exclusion because you are only being taxed at a 10% rate (much lower than the rate you are likely to pay in the U.S.). Thanks! Yes, if someone uses the FTC they can easily switch to the FEIE. If eligible, you can claim a foreign tax credit on foreign income taxes owed and paid by filing Form 1116 with your U.S. income tax return. Therefore especially if I take a buyout, I would for sure exceed the FEIE. My question refers to self employment income which was not covered in your post. I am an expat working in China. What is the Foreign Earned Income Exclusion? A conversion and a contribution are different. Get the latest local Detroit and Michigan breaking news and analysis , sports and scores, photos, video and more from The Detroit News. For tax year 2021, the maximum foreign earned income exclusion amount is the lesser of the foreign income earned or $108,700 per qualifying person. Hi David, Ive been trawling the internet for help as I fill in my tax return and your site has been by far the most helpful! Special rules apply to Foreign Service and military personnel. In addition to the foreign earned income exclusion, you can also claim an exclusion or a deduction from gross income for your foreign housing amount if your tax home is in a foreign country and you qualify under either the bona fide residence test or the physical presence test. Also, the carry over tax credit only goes back 10 years, however the depreciation recapture goes back 37 years to the purchase of the property. There is no requirement to file a tax return with zero income to keep the FEIE. When I decide to sell, is there any exemption or other mechanism I can use to avoid paying capital gains taxes twice (as I will need to pay foreign capital gains taxes in the country of sale)? This is especially likely when you are earning a relatively high income, in a country with a lower tax rate than the U.S. You would apply the Foreign Earned Income Exclusion to the first $112,000 (2022 figure) of your income and would use the Foreign Tax Credit to reduce your liability on your income above $112,000. For purposes of subsection (a), the foreign personal holding company income, the foreign base company sales income, and the foreign base company services income shall be reduced, under regulations prescribed by the Secretary, so as to take into account deductions (including taxes) properly allocable to such income. Without reviewing all of the facts of her circumstances I cant be certain. Thank you! An official website of the United States Government. [1] Taxpayers filing a joint return are entitled to up to two exclusions if both have earned income. Your abode is also not necessarily in the United States while you are temporarily in the United States. You can choose the foreign earned income exclusion and/or the foreign housing exclusion by completing the appropriate parts of Form 2555. When is the Foreign Tax Credit More Beneficial Than the Foreign Earned Income Exclusion? (120,000 vs 10,000 $) to open up Roth IRA? You would not have both a foreign housing deduction and a foreign housing exclusion unless during the tax year you were both self-employed and an employee. Is claiming the FTC the way forward for us? In most situations, U.S. expats can offset foreign-earned income with: The Foreign Tax Credit (FTC) The Foreign Earned Income Exclusion (FEIE) However, there are some extra steps and you should be aware that you wont be able to claim the FEIE again for 5 years, unless you obtain IRS pre-approval. I also hold a French passport and plan to move to Tahiti for a few years which is a French territory. Foreign taxes paid or accrued on income for which you are claiming an exclusion on Form 8873, Extraterritorial Income Exclusion. Thank you. If you need to adjust your AGI to find your MAGI, there are worksheets in the Publication 970 PDF to help you. Ive always used the FEIE since I can remember living in Brazil, UK and Switzerland, but am considering using the FTC this year, because of a Roth IRA contribution that is now being classified as over contribution. Along with being applied differently, they also have substantially different bars for qualification. The foreign housing exclusion or deduction is computed in parts VI, VIII, and IX of Form 2555. If your income is earned in France (45%), Spain (47%), or any other high tax country, the credit is likely to be more beneficial. To lower the tax burden, the U.S. government gives these citizens a few credits, exclusions, and deductions they can use, including the foreign earned income exclusion and the foreign tax credit. Will I be accidently revoking the election? That way you dont need to worry about passing the bona fide residence test or limiting your time in the US so that you can pass the physical presence test. Will I have to pay both foreign and US capital gains taxes? Can claim any credit that you didn't claim on Form 1040 or 1040-SR, such as the foreign tax credit, education credits, general business credit. Do I include that U.S. income on Form 1116, and if so, can I allocate the U,S. You should use preparation software that would handle this question for you. What happens if she does go the U.S for 3 months and then returns to another apprenticeship where the German govt again doesnt take any tax? Many expats ask us which is better, using the tax credit or the foreign income exclusion. (living in New Zealand with rental property in New Zealand) many thanks. Would she be stuck then not being able to take either the FEIE or the FTC? My 18 year old daugher is a U.S./German dual citizen. What do you think? She is self employed and sold her condo in 2020. I am planning on selling the property. I hope you are well and will be kind enough to assist with my inquiry! Ignoring any deductions and exclusions (needless to say, the intricacies of Bulgarian tax policy are beyond the scope of this blog post), you are earning $150,000 which is taxed at a flat rate of 10%, so $15,000 in taxes. A 12-month period may begin on any day of any month. My wife and I married last summer. I normally use the FEIE however, this year I am wondering if it wouldnt be better to use the FTC since I havent been able to claim the Child Tax Credit because of the FEIE. Depending on your income level you could use either or a combination of the two. I invoked the foreign income exclusion in previous years but Ive recently stopped working. Ok heres a Foreign Tax Credit.. My income was $32,000 last year. Im a US citizen living and working in Germany for a while. This does not seem right am I missing something? In November of last year, you moved your spouse, children, furniture, and family pets to a home your employer rented for you in London. Can I claim the foreign tax credit on that income? About . I have question. Foreign Tax Strategies. Yes, that shouldnt be a problem. Does this mean I simply 1) Pay German taxes, 2) fill out IRS form 1040, and then 3) opt for the Foreign Tax Credit? This is extremely helpful info! My question is does the FTC offset SE taxes in the US or are they always due? Youre correct. Hi David! On an expat forum it was suggested that by claiming FTC rather than FEIE, I could have received Child Tax Credit for each of my children. If you income was less than the standard deduction, you wont need to apply the FEIE or FTC. A return should be prepared both ways to determine which option is in the taxpayers best interest given their specific facts. My job transferred to the Cayman Islands. Thank you very much for your reply-really appreciate you taking the time to help me! Thats correct. So long as your income is below the Roth IRA maximum AGI threshold you could contribute based on Japanese income that is offset by the FTC. Hi there, thanks so much for writing this post. I did not qualify for the expanded Child Tax credit this year due to the fact that I was not in the US for 6 months of the year but if I dont use the FEIE i can still qualify for the additional Child tax credit of $1400 for each kid. Hi, this site is very helpful. You are not considered to have a tax home in a foreign country for any period during which your abode is in the United States unless, for tax years beginning after December 31, 2017, you are serving in support of the Armed Forces of the United States in an area designated as a combat zone. If you are eligible, you should prepare your tax return under both the Foreign Earned Income Exclusion and the Foreign Tax Credit to see which one is more beneficial. But what about those of us who live in Europe (or another place that is NOT a tax haven) and have US income that is taxed by our country of residence. (Exclusion is adjusted annually for inflation). Except to the extent provided in regulations prescribed by Ive been in the UK for the last 2 years, and work for the UK branch of my company, so Im paying income tax there on a Pay as you Earn basis. Example 4: Lets take our Bulgarian example again. And if I go over the FEIE, can I use FTC on the amount Im over, and also apply the foreign tax I paid to the 20% Federal Withholding my 401K charged me for a foreign resident CARES act withdrawal? Eligibility for the exclusion may be affected by some tax treaties. Youre correct. Anita Im glad you like the post! I recommend reviewing the Nonresident Alien Spouse Treated as a Resident section of IRS Pub. If someones capital gains income is taxed in their country of residence they can determine the amount of tax attributable to that income and claim a foreign tax credit on their US return. Form 1116 is the form you file to claim the Foreign Tax Credit, and you file with your yearly tax return. The Physical Presence Test requires the taxpayer to be physically located outside the U.S. for 330 days during a 12-month period and establish their tax home in a foreign country. My wife doest work and son is in full time education. That being said, dont take this as advice that you should make a Roth contribution. However, I was wondering, what exactly counts as a revoked FEIC? My income with the FEIE is zero, as its about half the limit of FEIE. Someone earning $34,000 would have all of their income excluded by the FEIE and would need to use the FTC if they wanted to make IRA contributions. The limit on housing expenses varies depending upon the location in which you incur housing expenses. Depending on your income you may even want to take the FEIE and the FTC. The FEIE requires a person to have earned income to claim it, so if someones spouse does not work they would not be eligible. BUT, I need a negative number on line 8 to reduce my foreign business income on line 3 sched 1 which should be covered by the FEIE. The income is still reportable on your U.S. income tax return, but by using the Foreign Earned Income Exclusion you can exclude the first $112,000 from U.S. taxation. I earn below the US Standard Deduction and claim that on my taxes, therefore do I need to file the FEIE or FTC? The Foreign Earned Income Exclusion is an IRS provision that US expats can claim in 2022 when filing from abroad to reduce their US tax bill. Withdrawals from retirement accounts do not qualify for the FEIE, so the FTC is your only option for that income. 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