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Congress has provided substantial tax benefits for foreign workers, including missionaries.  This U.S. citizens working in another country. This affects what a missionary Reliant International worker might owe in Federal Income Taxes.  It federal income taxes. It does not change Social Security tax obligations of employees working outside the US.  In 2018U.S. In 2022, an eligible foreign worker can exclude up to $104to $112,100 000 of income from income tax.

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?

The foreign earned income exclusion only excludes income earned for work performed in a foreign country. It does not matter where the employer is located, as long as the work is performed in a foreign country. “Foreign earnings” do not include earnings for work done for the mission while inside the United States for duties such as deputation or furlough, before or after the work in the foreign country.

For this exclusion, “foreign earnings” do not include earnings from a bank account or other investments, regardless of the location of the investment. If a pay period covers both time in the United States and time in a foreign country, the pay for that period is allocated based on the number of days in each location.

Tests for

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eligibility

There are two tests for determining whether a worker is outside the U.S. long enough to qualify. A worker in a foreign country only has to qualify under one of the tests. During a foreign stay of four years, for instance, different tests may be applied each year: 

• Physical Presence: The worker was present in the foreign country for 330 full days during a continuous 12-month period.
• Bona Fide Residence: The worker established residence in a foreign country for a period that includes an entire tax year. After establishing residency with the physical presence test, that worker then is a "Bona Fide Resident" in future years. 

In most cases, a foreign worker will first establish physical presence during the first year of eligibility of Foreign Earned Income.  After After having established physical presence, foreign workers are then considered "Bona Fide Residents.".    For   For years following, if that worker continues to live and work outside the United Statesin a foreign location, the Bona Fide Resident Definition definition applies in most cases.   There are other qualifications for Bona Fide Residence, and a missionary worker should consult a tax consultant if they will not meet the physical presence test in the first year. 

Once Bona Fide Residence has been established using the Physical Presence physical presence test, a foreign worker continues to use that exclusion while working in their place of residence.  That That worker does not need to continue to meet the physical presence test in subsequent years.

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Claiming the Exclusion

A missionary worker 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 worker has qualifying foreign income. The information required for the form will demonstrate how the missionary worker 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 worker will report the dates that they worked outside the US U.S. and the dates they worked inside the US U.S. each year.  The  Physical The Physical Presence requirement only needs to be satisfied the first year of qualifying for foreign earned income. 

Common Questions

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title Why am I still paying Social Security Tax?
The Foreign Earned Income Exclusion does not exempt income from Social Security taxes.

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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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title Why is Federal Tax still being withheld from my paycheck?
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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title What if I need to file my taxes before I qualify for FEIE?
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: Delay filing your taxes by utilizing extensions to delay your filing deadline OR  File on the date and submit a corrected return later.  Be aware that, if

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you are residing or working outside the U.S. on April

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15, your tax

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return is not due until June 15.

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title What if I

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return to the

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States before

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I qualify?

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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title Do I lose the FEIE during furlough?
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.

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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 worker rarely owes more tax during a furlough.

Other Tax Considerations

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Several other tax-related items beyond the scope of this article may affect some missionariesinternational workers:

• • 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 Most Reliant missionaries workers will not use this exclusion simply due to the fact that the base Foreign Earned Income Exclusion is greater already that than most missionary international salaries.  When When the Foreign Earned income exclusion matches or exceeds your salary, you do not need to itemize housing separately. 

For the foreign housing calculation, the base household expense amount is 16% of the foreign earned income exclusion ($104$112,100 000 x 16%=$16$17,656, 920 in 20182022), so housing costs of less than $16$17,656 920 are not excludible. The maximum amount of the foreign housing exclusion is limited to 30% of the foreign earned income amount ($104$112,100 000 x 30%= $31$33,230600).

• • For 20182022, housing costs in excess of $16$17,656 920 but less than $31$33,230 600 can be excluded in addition to the foreign earned income exclusion.
  • A missionary worker whose taxable compensation is less than $104than $112,100 000 already has all of his or her income excluded by the foreign earned income exclusion.
  • A missionary worker who has taxable compensation of more than $104than $112,100 000 but housing costs of less than $16than $17,656 920 does not have sufficient housing costs to claim an additional exclusion for housing cost.
  • A missionary worker whose housing is excluded by the minister’s housing allowance already excludes housing costs from income. (There is no minimum threshold.)
  • A missionary worker who is required to reside on the mission’s business premises in order to perform their job (house parent at a mission school, for instance) already has the value of their housing excluded from income.
  • A missionary worker whose taxable compensation is more than $104$112,100000, who does not qualify for minister’s housing allowance, and whose housing costs exceed $16$17,656920, may claim an additional exclusion for housing (please consult your tax advisor for specifics).

Additional Resources

The following resources are available from the IRS website at www.irs.gov:

• IRS Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad
• https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion-bona-fide-residence-test
• Forms 2555 and 2555 EZ, Foreign Earned Income and their instructions
• Form 673, Statement For Claiming Benefits Provided by Section 911 of the Internal Revenue
Code
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• http://www.irs.gov/Individuals/International-Taxpayers/Foreign-Earned-Income-Exclusion

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Who can I talk to for help with tax decisions?

Reliant can not make recommendations about tax decisions, so it is the empmloyee's responsibility to seek that input from a financial advisor or tax specialist.

Below is a tax specialist that the Reliant International Team has vetted for experience and accuracy with International Tax matters:

Please do not hesitate to contact the CPA firm of Capin Crouse, if you have any personal questions about foreign earned income exclusion:
www.capincrouse.com      info@capincrouse.com

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