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The foreign earned income exclusion: a Q & A

In recent posts, we've explored how maintaining compliance with rules for offshore accounts has become increasingly burdensome in recent years. These burdens include stepped-up enforcement of existing requirements and the implementation of a complicated new law, the Foreign Account Tax Compliance Act (FATCA).

There is another aspect to foreign income reporting, however, that also merits attention: the foreign earned income exclusion.

In this post, we'll use a Q & A format to discuss how that exclusion works.

Who is entitled to use the foreign earned income exclusion and what does it involve?

Generally the U.S. taxes its citizens and resident aliens living abroad on all of their worldwide income. FATCA, enacted in 2010, has taken the principle to entirely new levels, making U.S. taxpayers living outside the U.S. subject to much more detailed asset-reporting requirements.

But if you are such a taxpayer, the foreign earned income exclusion allows you to exclude a certain amount of your foreign income from taxation.

Who is considered a resident alien?

Let's answer this in two parts. First, an alien, for tax purposes, is someone who isn't a U.S. citizen or U.S. national. U.S. nationals include not only U.S. citizens, but also certain people born in American Samoa or the Commonwealth of Northern Mariana Islands.

A resident alien is someone who has received a green card or established a substantial presence in the U.S. A "substantial presence" includes spending at least 183 days in the U.S. during a 3-year period.

How much income can you exclude under the foreign earned income exclusion?

The amount is adjusted annually for inflation. In 2015, it was $100,800.

There are also certain amounts for foreign housing that can be deducted or excluded from income. In addition, there detailed rules on certain types of benefits that are not considered income, such as pay earned in specific combat zones.

 

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