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This summary provides the basic requirements for claiming the foreign earned income exclusion, plus some additional information. We cover:
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What income can be excluded?
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Once Bona Fide Residence has been established using the physical presence test, a foreign worker continues to use that exclusion while working in their place of residence. That worker does not need to continue to meet the physical presence test in subsequent years.
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A full statement of the physical presence test has three elements: 1. Physically present in the foreign country or countries. Travel time to and from the foreign country, and any return trips to the U.S., would not be included in foreign physical presence. The time does not have to all be in the same country. |
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Bona fide residence requires intent to stay in the foreign country for an extended or indefinite stay, and that residence covers an entire tax year. It does not require a plan to live there for the rest of the missionary’s life, but the intended residence is on-going and indefinite. Once a missionary establishes their tax home in a location during the first year of residency, that person is considered a Bona Fide Resident for subsequent tax years. If a missionary wishes to use the Bona Fide Resident test to establish residency in their first year of residence, they may wish to consult a tax adviser. The intent may be demonstrated by factors that show the missionary has made a longer-term or indefinite commitment, though there are no specific factors which are required in every case; interpretation is needed. Example: A missionary staff member without a husband or dependents arrives in France on November 1, 2020, planning to stay for four years. She rents an apartment with a one-year renewable lease, obtains a French driver’s license, and files taxes in France as a resident. She takes a two-week vacation annually back to the U.S., but otherwise lives in France until May 30, 2022, when for personal reasons she returns to the U.S. to live. She was a resident of France for all of 2021, and her compensation from November 1, 2020 until May 30, 2022 will qualify for the foreign earned income exclusion. |
Claiming the Exclusion
A missionary must file the right form to claim the foreign earned income exclusion. Form 2555 (or Form 2555-EZ) is filed with the tax return each year in which the missionary has qualifying foreign income. The information required for the form will demonstrate how the missionary met one of the above requirements and the amount of income that was not taxed because of the foreign earned income exclusion. That means that the missionary will report the dates that they worked outside the U.S. and the dates they worked inside the U.S. each year. The Physical Presence requirement only needs to be satisfied the first year of qualifying for foreign earned income.
Common Questions
If I qualify for the foreign earned income exclusion, why do I still have to pay Social Security taxes such as FICA/Medicare or SECA if I’m a minister?
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The Foreign Earned Income Exclusion does not exempt income from Social Security taxes. It only relates to Federal Income Tax. |
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If I will qualify for the foreign earned income exclusion. How do I avoid having so much withheld from my check?
An international missionary may ask the finance team to change the amount paid each month toward Federal Income Tax. This request can be included on the W4 form, or by written instruction.
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Unless you are Ordained and Commissioned and have chosen to opt out of Social Security system, you will be required to pay Social Security Tax on all earned wages. See Working with Reliant as a Commissioned or Ordained Minister |
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If you qualify for FEIE and would like to change your the withholdings from your paycheck, you will need to fill out a new W4. |
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If you need to file a tax return before completing your period of physical presence or tax year of residency |
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, you can either:
Be aware that, if you are residing or working outside the U.S. on April 15, your tax return is not due until June 15. |
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The minimum time requirements for bona fide residence and physical presence can be waived if you must leave a foreign country because of war, civil unrest, or similar adverse conditions in that country. If you leave for personal reasons before meeting the requirements while seeking to qualify for the physical presence test, you will not be able to use the foreign earned income exclusion. |
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Furlough is a temporary work assignment in the U.S. It does not constitute a change in residence in most circumstances. Therefore, it does not interrupt "Bona Fide Residence" of someone utilizing the Foreign Earned Income Exclusion. IRS form 2555 will ask how many days you worked in the U.S., and you will need to report that. Technically, earnings for work in the U.S. are taxable ; however, due to the standard deduction level, a Reliant missionary rarely owes more tax during a furlough. |
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Other Tax Considerations
Several other tax-related items beyond the scope of this article may affect some missionaries:
- Some foreign countries may tax your income.
- If foreign earned income exceeds the published limit for that year, you may benefit from the foreign tax credit, foreign housing allowance, other deductions, and tax treaties. Discuss this with your tax advisor.
- Investment or other income earned in the U.S. while working in a foreign assignment will still be subject to the normal tax rules.
- Most states base taxation on residency in the state, and generally exempt income if it would qualify for the federal foreign earned income exclusion. You should consult the tax laws in your home state.
Additional Exclusion: Foreign Housing
The foreign housing exclusion essentially allows the exclusion of some overseas housing expenses that exceed a calculated threshold from income. The foreign housing exclusion is in addition to the foreign earned income exclusion. Most Reliant missionaries will not use this exclusion simply due to the fact that the base Foreign Earned Income Exclusion is greater already than most missionary salaries. When the Foreign Earned income exclusion matches or exceeds your salary, you do not need to itemize housing separately.
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Name | Title/Specialty | Contact Info |
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| Krystal Rose | Village Tax Services Missionary-Tax Services 312 W. 1st Street Suite 501 Sanford, FL 32771 Clergy & Overseas Tax Specialist | phone: 407-385-0267 email: info@missionarytax.com website: www.missionarytax.com |
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