What Is the Foreign Earned Income Tax Exclusion, and How Do You Qualify?

By Melanie Lockert, Contributor, on February 9, 2018

Share this:

As freelancers, we often get to enjoy more freedom than our 9-to-5 counterparts — something you should be taking advantage of every step of the way. That can mean setting your own schedule, saying yes or no to certain projects and even choosing to live and work abroad.

If you’re thinking of setting up shop in another country, or you’re currently living and working abroad, there are some things to consider about your tax situation, like seeing if you qualify for the Foreign Earned Income Tax Exclusion.

Surprise: You’re Taxed on Your Worldwide Income

Just because you’re living and working in another country doesn’t absolve you from paying taxes to the United States. Let’s face it: Uncle Sam still wants his share. And according to the IRS, “United States citizens and resident aliens are taxed on their worldwide income, whether the person lives inside or outside of the United States.”

Other nations don’t require citizens living abroad to pay taxes to their home country — only to the country where they currently reside. In fact, the U.S. is the only major industrialized country that taxes citizens based on their worldwide income. If you’re an American citizen living the good life and working abroad, you still have to pay taxes to the country you’re living in and the United States. But it’s not all bad news: Through the Foreign Earned Income Tax Exclusion, you may be able to avoid getting hit with double taxation.

So, What Is the Foreign Earned Income Tax Exclusion?

When you’re a freelancer, your tax situation is already complicated — and some may even say it’s less than ideal. You don’t pay taxes once a year like everyone else. Instead, you have the pleasure of writing larger-than-life checks four times a year to the IRS. On top of that, there’s the self-employment tax, and that can be costly.

So the idea of paying taxes to the U.S. while living and working in another country might seem like a cruel joke. The good news? You could qualify for the Foreign Earned Income Tax Exclusion, which lets you exclude a specific amount of your foreign earnings. The maximum amount you can exclude for 2017 is $102,100. Yes, this exclusion can help lower your regular income tax, but it unfortunately won’t lower your self-employment tax.

How Do You Qualify?

In order to take advantage of this exclusion, you need to meet certain qualifications. For example, you need to pass the “bona fide residence test” or the “physical presence test.”

You can pass the bona fide resident test if you’ve lived and worked in another country for an entire tax year, from January 1 to December 31. And you can meet the physical presence test if you’ve lived and worked abroad for 330 days of a 12-month period.

You can also check out this nifty chart below to see if you qualify. I also recommend using the IRS’ interactive tax assistant.

To calculate your Foreign Earned Income Tax Exclusion, fill out Form 2555 and file it along with your tax return. This exclusion is only available for U.S. citizens who qualify and file a tax return.

Overall, if you’re a freelancer living and working abroad, you should take the time to research this tax exclusion. After all, who wants to pay more taxes than they need to? By staying on top of the latest exclusions and deductions, you can keep more of your hard-earned money and boost your bottom line.

Share this:

Leave a Reply