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How Do You Qualify for the Foreign Earned Income Exclusion?

Offshore Account Update

Posted on February 17, 2023 |

If you are a Massachusetts resident (or former Massachusetts resident) who is living abroad, you may qualify for the IRS’ Foreign Earned Income Exclusion (FEIE). This exclusion allows you to exclude up to $112,000 of your foreign-earned income from your federal taxable income. But, determining your eligibility for the FEIE and calculating the amount of your eligible foreign-earned income is not easy; and, even if you don’t have to pay tax on this income, you must still report it on your annual return.

Qualifying for the IRS’ Foreign Earned Income Exclusion

As a U.S. taxpayer living abroad, you must meet several requirements in order to qualify for the IRS’ Foreign Earned Income Exclusion. As a baseline, you must be able to establish that your “tax home” is in a foreign country. The IRS defines your tax home as follows:

“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. Your tax home is the place where you are permanently or indefinitely engaged to work as an employee or self-employed individual.”

The IRS goes on to state that your tax home is “not necessarily . . . your residence or domicile for tax purposes.” However, the IRS also advises that 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.” Your “abode” is determined based upon “where you maintain your family, economic, and personal ties.”

As you can see, determining your tax home is not necessarily a straightforward process. This is particularly true when you are only working overseas for a limited period of time or you maintain a residence in Massachusetts while primarily living abroad. However, to provide further clarification (and to limit eligibility for the FEIE), the IRS also requires that U.S. taxpayers meet one of the following two requirements:

  • You are a “bona fide resident” of a foreign country (or foreign countries) for an uninterrupted period that includes the entire tax year; or,
  • You are physically president in a foreign country (or foreign countries) for at least 330 full days during any period of 12 consecutive months.

Additional Requirements to Claim the FEIE

Even if you meet the basic requirements to qualify for the Foreign Earned Income Exclusion, this still doesn’t necessarily mean that you can claim the exclusion on your federal returns. The FEIE only applies to certain types of earned income, and certain workers (i.e., U.S. government employees) are not eligible to claim the exclusion. As a result, it is best to consult with a professional to make sure you are eligible before claiming the FEIE; and, if you have concerns about claiming the FEIE or failing to report your foreign-earned income in the past, you should consult with an international tax lawyer in Massachusetts promptly.

Contact International Tax Lawyer Kevin E. Thorn in Boston, MA

If you have questions or concerns about claiming the Foreign Earned Income Exclusion, we invite you to contact us. To request a confidential consultation with international tax lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group, please call 617-692-2989, email ket@thornlawgroup.com or contact us online today.

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