IJ Zemelman May-01-2015
Individuals who are overseas working on a contract face unique challenges when it comes to qualifying for the Foreign Earned Income Exclusion (FEIE). More often than not, the IRS expects that you will be returning to the United States at some point in the future.
Servicing an overseas contract as a US Citizen is a challenging prospect when you consider how the IRS views US Expats on a contract abroad. Qualifications for the FEIE under the Physical Presence test mandate that you live in a foreign country for a minimum amount of 330 days out of the 12 consecutive months.
The FEIE is a deduction available to US Expats which allows US Citizens living and working abroad to deduct a sizable portion of their foreign earned income from US taxation.
The Foreign Earned Income Exclusion, or FEIE, is an exclusion of income available to US Expats living abroad and earning foreign income. When claiming income earned in 2015, US Expats will be allowed to deduct $100,800 (this amount is for single taxpayers; married couples filing a joint return can deduct up to $201,600) of foreign income from their US expat tax return to avoid double taxation. For income earned in 2014, the FEIE allowance is $99,200 for single taxpayers and $198,400 for married couples filing a joint return. In order to qualify for the FEIE, you must either pass the Bona Fide Resident Test or meet the qualifications of the Physical Presence Test.
The Bona Fide Resident Test stipulates that you must be living abroad for at least one year without any plans of returning to the United States.
In order to meet the qualifications of the Bona Fide Resident Test, you must have lived overseas for a minimum of one year and have no plans of returning to the United States. Since the IRS assumes that overseas contractors will be returning to the US upon completion of their contract, American Citizens and Green Card Holders on a foreign contract do not meet the conditions of this test.
The Physical Presence Test requires a US Expat to live in a foreign country for 330 days out of a period of 365 days. With this test, there are no requirements stipulating your future plans.
If you are an overseas contractor who has already been living abroad for 330 days, you already meet the conditions of the Physical Presence Test. If you’ve not yet been in your host country for 330 days, you still have the opportunity to meet these requirements by requesting a US expat tax filing extension from the IRS.
It’s important to understand that – when considering the Physical Presence Test – ‘almost’ doesn’t count. If you’ve been living outside of the U.S. (in one or multiple countries) for 329 days, you do not yet meet the conditions of the Physical Presence Test. You may request an extension as far in the future as October 15. If you don’t meet the Physical Presence requirements by October 15, you, you may even be granted a US expat tax filing extension all the way to December 31 by filing form 2350.
If you moved to a foreign country in the middle of the year, you can only deduct the percentage of the FEIE that is consistent with your time spent abroad during the tax year in which you moved.
Assume you moved to your host country to start your foreign contract on May 1, 2013. You will have been living abroad for 330 days on March 26, 2014. With this example, you would have lived in your host country for 245 days in 2013. When you file your US expat tax return for 2013, you must take 245 and divide it by 365. That is 67% of the year, and 67% of $97,600 is $65,392; so you would be able to deduct up to $65,392 of foreign income from your US tax liability.
I.J. Zemelman, EA is the founder of Taxes for Expats