What is foreign earned income

Now, that's a lot to take in and the determination of the month period can be somewhat complicated. However, there is some help for you. You can look in Publication 54 which is the tax site for U. The minimum time requirement specified under the bona fide residence and physical presence tests may be waived if you had to leave a foreign country because of war, civil unrest or similar adverse conditions.

Each year, the IRS publishes a list of countries and the dates that qualify for this waiver in the Internal Revenue bulletin. Now, it's so very important to check this listing because just because the country you were in was a dangerous place does not mean that it's going to be listed on the list of countries that qualify for a waiver. Sherry, I think right now is a perfect time for our second polling question.

OK, audience, our second polling question is an individual moved to a foreign country in November of and had to leave in July of because the employer went out of business. Is this a situation that qualifies for a waiver? So, please take a minute, click on the radio button that you believe most closely answers this question based on the information that Tracy just shared. Do you think that the correct answer is yes, it does qualify for a waiver or no, it does not qualify for a waiver?

And remember, if you're not getting the pop-up box, you can always use the, ask question, feature to submit your response to the polling question.

Don't forget to hit, submit, if you're using the, ask question, box. The question is an individual moved to the foreign country in November , had to leave in July of because the employer went out of business. Does this situation qualify for a waiver? If you think it does, click on A. If you think it does not, select B.

Give you another couple of seconds without me talking. We're going to stop the polling question now. And we'll share the correct answer on the next slide. And the correct answer is B, no, it does not qualify for a waiver.

I see that 70 percent of you responded correctly, not so little but low. Tracy, can you expand on the question a little bit? You may have missed what I said, but basically, in order to waive the minimum time requirements which is one tax year for people claiming bona fide residency status, they have to have one, they have to have a bona fide residency in a foreign country for a period that covers an entire tax year or the day requirement in a 12 consecutive month period for the physical presence test.

In order to waive those time requirements where you don't have to you can have less time than the amount specified, you have to have left the foreign country because of war, civil unrest or similar adverse conditions. And simply having your employer close up operations in a foreign country is not considered a similar adverse condition to war or civil unrest that would cause you to qualify for the waiver.

Each year, remember, the IRS publishes a list of countries and the dates that qualify for the waiver in the Internal Revenue bulletin and only if your, the country that you are claiming a waiver for is on that list can you actually possibly qualify for the waiver. So, hopefully that helps clarify things a little more. So, let's talk a little bit more about the waiver so it does seem to cause some confusion. Another condition for claiming a waiver is that to qualify for the waiver, you must be able to show that you had a tax home in the foreign country and that you reasonably could have been expected to meet minimum time requirements on the physical presence test or the bona fide residence test except for the fact that you had to leave the country.

You must actually have had a tax home in the country and be a bona fide resident or physically present in the foreign country on or before the beginning date of the waiver specified in the bulletin. If you established residency or physically present in the foreign country after the date that the waiver is slated to begin, you're not going to be eligible for the waiver.

Now, in claiming a waiver, the minimum time requirement, you submit a statement with your tax return explaining that you expected to meet the applicable time requirement but that the conditions in the foreign country prevented you from the normal conduct of business and you write the words, claiming waiver, in the top margin on page one of either the Form or EZ that you're filing with that return.

And now, moving on. So, we've talked about waivers, now, how do you actually claim a foreign-earned income exclusion?

Well, first of all, you must file a tax return in order to claim the foreign-earned income exclusion. This is true even if your foreign earnings are below the foreign-earned income exclusion threshold; you still have to file your U.

Now, Sherry, I know that we just finished our second polling question, but I think it's time to stop here again for our next polling question. That's fine with me, Tracy. Let's see how you've been paying attention. An individual must file a return even if there's no tax liability after claiming the foreign-earned income exclusion. Please take a minute, click on the radio button you believe most closely answers this question.

So, based on what Tracy has been telling you, do you think that statement is true, if so, click A or false.

If you think it's false, you click B. Of course, the statement is an individual must file a return even if there's no tax liability after claiming foreign-earned income exclusion. Don't forget, if you're not getting these pop-up questions, then you can put your answer in the, ask question, box. A for true; B for false or you can type in true or false. All right. I'll give you just another couple of seconds to make your selection. And OK, we're going to stop the polling now and share the correct answer on the next slide.

And the correct response is A, that statement is true. So, let's see how you all did. Oh, that's excellent, 98 percent of you got that correct. OK, Tracy, back to you. Let's go on and continue our discussion of how you elect to take the foreign-earned income exclusion. So, the election to exclude foreign-earned income and the election to exclude the cost of foreign housing are separate elections.

You make one or both election by attaching a Form or EZ to your tax return for the first year for which it's effective. On the Form , be sure to provide the Social Security number of the individual who's making the election.

Once you choose to exclude your foreign-earned income, your choice remains in effect for that year and for all later years unless you revoke it. Also, please keep in mind that once you choose to exclude foreign-earned income, you cannot take a foreign tax credit or deduction for taxes on income that you can exclude under the foreign-earned income exclusion.

If you do take a credit or deduction for any of those taxes in a subsequent year, your election for the foreign-earned income exclusion will be revoked beginning with that year and you will not be allowed to claim the foreign-earned income exclusion for the next five years.

The timing of the foreign-earned income exclusion is that you have to make your initial choice of the exclusion on Form or Form EZ and you have to make them with a timely filed return including any extension, a return amending a timely filed return, or a late filed return filed within one year from the original due date of the tax return which is determined without regards to any extension. Now, since today is June 6, here's a timely reminder. This means that U.

If you live abroad and can't meet the June 17 deadline for filing your U. This is done by filing an extension request which is Form and this can be filed either on paper or electronically, but you have to do it by June Filing Form will not extend the time you have to pay any tax due, but will give you an extension until October 15, to file your tax return.

There's a limit to the amount of foreign-earned income an individual is allowed to exclude. If your qualifying period is less than a year, the limitation amount has to be prorated. For example, you cannot take a foreign tax credit or deduction for taxes that are allocable on excluded income. If you do take a credit or deduction for any of those taxes in a subsequent year, as I mentioned previously, your election for the foreign-earned income exclusion will be revoked beginning with that year.

In addition to the restrictions on taking a foreign tax credit or deduction allocable to excluded income, you are also not eligible to claim certain other credits such as the earned income credit and the additional child tax credit when taking the foreign-earned income exclusion.

And in addition, you must add back the excluded foreign-earned income exclusion amount when computing modified adjusted gross income for some tax purposes. The exclusion amount is figured in Part A of the Form and then it gets carried to line 21 of Schedule 1 of Form and that's for tax year , because as of , the was revised and there's no longer a Form EZ or A and some of the lines where that you and schedules where you reported things in the past may have changed.

So, take a good look at the current year version of the when completing it; there's additional forms and schedule and some things may have moved around. So, this foreign-earned exclusion is recorded on line 21 of Schedule 1 of the Form and it's subject to the limitations we discussed earlier, which, again, is the lesser of the maximum foreign-earned income exclusion amount for the year or the amount of your foreign-earned income minus your foreign housing cost. Now, you must also subtract deductions that are allocable to the excluded income to arrive at your foreign-earned income exclusion.

The result is the amount that should be entered on line 21 of Schedule 1 of the Form And when you enter that amount on that Schedule, line 21 of Schedule 1, you need to notate on that line Form So, what if you had foreign-earned income from both wages and self-employment? In that case, the amount of income you exclude is deemed to include a pro rata amount of both your wage income and your income from self-employment.

So, the foreign-earned income exclusion must be reduced by a pro rata portion of the deductible expenses attributable to your self-employment income as well as any foreign housing exclusion you may have claimed if during the year you were also an employee. Let's talk a little bit more about if you're a self-employed individual. So, if you're a self-employed individual and you're qualified, you can deduct the lesser of your foreign housing cost amount which you will need to look at the instructions of Form or your foreign-earned income minus the foreign-earned income exclusion you're claiming, minus any foreign housing exclusion you may be claiming if, for example, you were also an employee with foreign-earned income for the year.

So, let's give you a for example. Any part of your housing cost deduction that is not allowed because of this limitation may be carried forward to the subsequent year. This carryover is limited to the subsequent year only. So, if you don't use it, it's going to be lost after the next year. Calculating the foreign housing deduction and foreign housing exclusion are a little beyond the scope of what we can cover in the time allotted for this presentation, however, we do have a couple of practice units which are available on irs.

We have a link and a citation as far as what the web link would be for these as well as other units that we have and material we have on the topic relating to the foreign-earned income exclusion that will be provided in a slide at the end of this presentation. Next, Bethany is going to talk to you about how a sole proprietor computes for foreign-earned income exclusion.

There are three amounts that a self-employed individual has to know upfront in order to calculate the foreign-earned income exclusion.

The first of these is your foreign-earned gross receipts. You need to know what amount of gross receipts for foreign-earned also, the amount of expenses definitely related to the foreign-earned gross receipts, that's the second thing you would need to know. And then the third thing would be the deduction for one half of self-employment tax. Our focus today is going to be on the sole proprietor of a service business. And for those of you who might be in another type of business where capital is a material income-producing factor, we do have a practice unit available on irs.

And Tracy is going to mention those at the end of this session. There will be a list of various practice units and a web address where you can access them. So, let's talk further about how to compute the foreign-earned income exclusion for a sole proprietor of a service business. So, all of their income and expenses for that business were all taken care of in the foreign country.

They earned all the money there and they, all the expenses relate to that money. So, this is important to understand. They're going to prepare their Schedule C exactly as they would have if they were operating a business here. They're going to put all their gross receipts on there. Then we would go to the Schedule SE and, of course, we don't have the time or the space here to walk you through all of these steps, so we just computed it for you and did the computations off screen.

Again, that's computing it on the Schedule C net income and then taking the deduction for half of that self-employment tax. Now, as I mentioned earlier, when calculating the exclusion amount, you have to subtract deductions allocable to the excluded income. That's a different piece so I don't want to confuse you here but we're talking about the first piece which is the standard foreign-earned income exclusion. That is what we consider it to be excluded from.

So, now that we have all the necessary amounts, let's calculate the foreign-earned income exclusion for this sole proprietor.

And that is what would be going on line 21 of Schedule 1 with the notation Form beside it if, of course, this person wasn't taking any housing deduction. And depending on the circumstances, it could be that one spouse qualifies and one doesn't, in that case, there would only be one or EZ. There could also be a situation where one spouse chooses to do a and the other one chooses to do a EZ or they both did the EZ form or they both did the So, it could be any of those combinations.

And that reminds me, I did see a question come in earlier. That one is still in existence. Sherry, I think this might be a good time for our final polling question. Thanks, Bethany. That's an excellent idea. Let's see how you do on this one. Is that statement true or is it false? Your answer is whether it's true or false. Remember, if you don't get the pop-up box, put your answer in the, ask question, button and hit, submit. Giving you a couple of seconds, make your, finalize your answers, don't forget to submit them.

And we are going to stop the polling question now and we will share the answer on the next slide. So, I see 86 percent of you answered the question correctly.

So, Tracy, I'll turn it back over to you to talk about how to decide which form to file. So, we've talked about the requirements that you have to meet in order to claim the foreign-earned income exclusion and we talked a little bit about how to figure that amount.

Next, we're going to talk about what form you need to file. So, in order to use the EZ version of the form, you have to meet certain requirements and the first is that you have to be a U. And you must have reported your total foreign-earned income on line 1 of your Form In addition, there are some other requirements.

You must also file a calendar year return for a month period, not have any self-employment income, have no business or moving expenses, not claim a foreign housing exclusion or deduction and not have any foreign housing deduction carryover from the prior year.

If you meet these requirements, you can use the EZ version of the form instead of the If you do not meet the requirements, then you must complete a Form instead. The Form EZ has four parts and is two pages long while the Form which is the longer version has nine parts and is three pages long. The four parts of the Form EZ are listed here on this slide. Part one will ask you if you meet the various tests.

As we discussed earlier, you must meet either the bona fide residence or the physical presence test. You must also meet the tax home test meaning that your tax home is in a foreign country and you do not have a U. Part two of the form asks for general information while part three asks you to list any of the days you were present in the United States during the year and of those days, how many you were in the U.

And finally, part four of the form helps you compute the amount of your foreign-earned income that you're eligible to exclude.

So, let's next talk about the Form which provides more detail and more information about how you meet the bona fide residence test or the physical presence test and also provides information about how much of your earned income is excluded and how to figure the amount of your allowable housing exclusion or deduction.

Part one of the Form will ask again for general information such as your foreign address, your occupation, the name of your employer, your employer's address and whether your employer is a foreign or U. If this is the first Form you have filed and if not, when you first filed the form and whether you ever revoked your foreign-earned income exclusion election and if so, when.

We also ask about which country you're a citizen or a national of and the location of your tax homes during the year and the day or date they were established. Now, the Form and the EZ are both available for you to access on the materials tab of this webcast so that you should be able to pull that down if you need to look at it while we're talking. If you claim the exclusion under the bona fide residence test, you could fill out parts one, two, four and five of the Form Part two of the form asks more specific questions about the bona fide residence test.

When you fill out part two, be sure to give your visa type and the period of your bona fide residence. Part two will ask for the dates the period of your bona fide residence when it began and ended and will ask about whether your family lived with you and if so, for what period.

Also, it asks whether you ever submitted a statement of non-residency to the foreign country and whether you were required to pay any income tax to the foreign country. It also asks whether you were present in the United States during the year and if so, on what days.

It also ask about any terms in your employment contract that would indicate how long you expect to work in the foreign country, what type of visa you have there and how long it's good for and whether you maintained a home in the United States and if so, who lived in it during the year. Now, if you claim the foreign-earned income exclusion by meeting the physical presence test in addition to the other requirements, you should fill out part one, three, four and five of the Form Part three of the form asks more detailed questions about the physical presence test.

So, when filling out part three, be sure to insert the beginning and ending dates of your month period and, remember, those can begin or end in the year before or after depending on when you start your month period. It doesn't have to be a calendar year. It also asks about the dates of your arrivals and departures as requested in the travel schedule in this section. If you're claiming a foreign housing exclusion or deduction, you fill out part six of the Form And you can refer to the instructions for the amount of your housing expenses you can complain, and they can claim, not complain and they will provide a lot more information about those housing expenses.

If you're claiming the foreign-earned income exclusion, you have to fill out part seven of the form. If you're claiming the foreign-earned income exclusion, the foreign housing exclusion or both, then you will also complete part eight of the Form You will fill out part 9 if you're claiming the foreign housing deduction is only available to individuals who are self-employed or have self-employment income.

If you and your spouse live apart and maintains separate households, you both may be able to claim the foreign housing exclusion or the foreign housing deduction so long as you and your spouse have different tax homes that are not within a reasonable commuting distance of each other and neither spouse's residence is within reasonable commuting distance of the other spouse's tax home. Each spouse claiming a housing exclusion must figure separately the part of the housing amount that is attributable to employer provided amount based on his or her separate foreign-earned income.

If you claim the foreign-earned income exclusion the housing exclusion or both, you must figure the tax on your non-excluded income using the tax rates that would have applied had you not claimed the exclusion. See the instructions for Form and complete the foreign-earned income tax worksheet to figure the amount of your income tax to enter on the Form line For those of you that must attach Form , alternative minimum tax for individuals to your return use the foreign-earned income tax worksheet provided in the instructions for the Form As we've mentioned earlier, the foreign-earned income exclusion is claimed on a Form or Form EZ.

These forms are available to be downloaded at irs. Let's talk about some other resources that we have available for you. Listed here on this slide are a few resources that you may find helpful. One of these is publication 54, which I mentioned earlier, which is the Tax Guide for U. We also have web pages about the foreign-earned income exclusion available on irs. And we've also included a couple of taxpayer assistance numbers, one for taxpayers inside the United States which is toll-free and one which is for individuals who are outside the United States which unfortunately is not a toll free number.

There are a number of practice units and we talked about these throughout our presentation about the foreign-earned income exclusion. You can find them at the web addresses listed on this slide.

Included in the types of materials that we have available for you that more fully explain some of the items we talked about today are a practice unit on the concept of the tax home for purposes of the foreign-earned income exclusion. We also have materials on the physical presence test and the bona fide residence test as well as several units on how to compute the foreign-earned income exclusion, one for how you compute it if you're an employee; another, on the topic of computing the foreign-earned income exclusion if you're self-employed and one that talks about partners and partnerships and how they can claim a foreign-earned income exclusion.

So, this concludes the presentation portion of today's webinar. Now, I'm going to turn the mike back to Sherry for the question and answer session. Thank you, Tracy.

Thank you, Tracy and Bethany and hello everybody. It's me again, Sherry Saucerman. I'm going to be moderating the question and answer session. Bethany and Tracy are staying on and they will be answering your questions. But be assured we will answer as many as we are able to. Also, if you're participating to earn a certificate and the related continuing education credit, you will qualify for two CE credits by participating for at least minutes from the official start time of the webinar, which was at the top of the first hour.

So, when we were chatting before the beginning of the webinars, before the top of the hour, just chatting about the In Case You Missed It and why you came to see the webinar. That time does not count. You start counting your time at the top of the hour. If you stay on for at least 50 minutes during the webinar presentations starting at the top of the hour, you will qualify for one credit.

Not the time before the official start time of the webinar. That doesn't count toward the 50 minutes. OK, Bethany and Tracy, I hope you're ready because as I told the participants we got a lot of questions.

Bethany, I'd like to start with you. Let's talk a little bit about the availability of the foreign the exclusion. So, is the foreign-earned income exclusion available to a missionary, living in a foreign country and receiving income from his U.

Yes, it could be, provided that they meet the qualification. And again, it's where the services are performed, so if the services are being performed in a foreign country then that is so, and I do want to distinguish between a short-term missionary and a long-term or a career missionary. If a person is only there for a brief stint, let's say a few months over this summer, clearly, they did not have a change in their tax home, clearly their abode would still be in the United States and that individual would likely not qualify.

I do not think they would meet any of the tests. On the other hand, if you contrast that with what is known as a career missionary, a person who sets out for foreign country typically early in life and they are there for decades, those people generally would be very likely to meet the qualifications for bona fide residency.

And I believe that I did see one of the questions in the text chat where the person said that the foreign country renews their visa every five years. And we understand there are some countries that it is nigh unto impossible for an American to receive a permanent resident visa from that country. Bona fide residency as Tracy mentioned is determined by a number of factors.

And, well, visa type maybe one of those factors, otherwise include the intent the duration of time that you're there, assimilating into the culture, learning the language. So as I said many of them would indeed to qualify as bona fide residents and if they do could appear and they do periodically have to come up here to visit their families up in the U.

And that vacation is not necessarily going to be a break either in their period of bona fide residency. If you are working in the US, your earnings are considered to be US earned income. This is true no matter who pays your salary, whether it is a US company or a foreign company.

If you own your own business and the primary income comes from personal service such as lawyers and doctors , the source of the income is wherever the services are performed. So if you work from a foreign country, your income will be foreign earned. For businesses whose primary income comes from selling products like a store or direct sales business , the source of the income will depend on whether you purchase or produce the items you sell. If the company purchases the items it sells from a foreign country, the income is foreign earned.

If the company produces the items it sells, then the country where the items are produced is the source of the earned income. This type of income includes interest, dividends, capital gains, rental property income, retirement income, etc. This category of income is a bit more complicated to determine whether it is considered US or foreign earned income. Here is a chart to help:. How does foreign earned income affect your US taxes? Well, like a lot of things, it depends upon your tax situation as a whole.

All your worldwide income must be reported on your tax return, including foreign earned income as well as US earned income. This does not mean that you will pay tax on this income though. There are several tax treatments that can be applied to a return that has foreign earned income, either excluding the income from taxation the FEIE or preventing you from being double taxed on it the FTC.

In order to qualify for the exclusion, you must:. Armed forces in designated combat zones overseas specifically contractors or employees of contractors may also qualify for the exclusion, even if their home is in the United States. If you work and live outside the U. You must meet the requirements of either the Bona Fide or the Physical Presence Test in order to exclude these costs.

Housing expenses that qualify for the exclusion include:. The amount of foreign income that you can exclude is limited to your annual maximum dollar amount limit or actual foreign wages, whichever is less.

Below are the maximum amounts for foreign income tax exclusion since the Tax Year adjusted for inflation :. After answering a few simple questions, the eFile app will select and generate the correct forms needed to claim the foreign income tax exclusion. The correct forms are as follows: Form , Foreign Earned Income if you are also claiming foreign housing cost amount exclusion or Form EZ, Foreign Earned Income Exclusion if you are only claiming the foreign income tax exclusion.

To view a full list of forms, click here and take note of the many forms eFile. Generally, you are required to pay self-employment taxes if you are abroad and a self-employed U. Your net self-employment income is used to figure your net earnings from self-employment. Net self-employment income usually includes all business income minus all business deductions allowed for income tax purposes, while net earnings from self-employment is a portion of net self-employment income.

This amount is figured on Schedule SE, Self-Employment Tax , The actual self-employment tax is figured on net earnings from self-employment. You must take all of your self-employment income into account when figuring your net earnings from self-employment, including income that's exempt from income tax because of the foreign earned income exclusion. If you are a U. In addition, you must pay the self-employment tax regardless of whether the income is exempt from U.

If you were a civilian who served in a combat zone or a qualified hazardous duty area in support of the U. Armed Forces , you can receive a deadline extension for the following:. Income taxes are forgiven for a U. Government civilian employee who dies as a result of injuries or wounds incurred while employed by the U. The injuries or wounds must have been caused by military or terrorist action directed against the United States or its allies.

The taxes are forgiven for the deceased employee's tax years beginning with the year immediately before the year in which the injury or wounds occurred and ending with the year of death. If you and your deceased spouse filed a joint return, only your spouse's part of the joint tax liability is forgiven. Get Your Tax Refund Date. What is DocuClix? Security About eFile. Where Is My Refund? How to Check Refund Status efile. Mailing Addresses Contact eFile. Sign In Start Now.

Foreign Income. Maximum Amount Foreign Income Exclusion. Tax Return Join Taxesfaction! More eFiler Reviews. Why Choose eFile.