Foreign Earned Income Exclusion

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

This summary provides the basic requirements for claiming the foreign earned income exclusion, plus some additional information. We cover:

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 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 having established physical presence, foreign workers are then considered "Bona Fide Residents."  For years following, if that worker continues to live and work in a foreign location, the Bona Fide Resident definition applies in most cases. There are other qualifications for Bona Fide Residence, and a 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 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.

Claiming the Exclusion

A 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 worker has qualifying foreign income. The information required for the form will demonstrate how the 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 worker 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

Other Tax Considerations

Several other tax-related items beyond the scope of this article may affect some international 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 Reliant workers will not use this exclusion simply due to the fact that the base Foreign Earned Income Exclusion is greater already than most international salaries. 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 ($112,000 x 16%=$17,920 in 2022), so housing costs of less than $17,920 are not excludible. The maximum amount of the foreign housing exclusion is limited to 30% of the foreign earned income amount ($112,000 x 30%= $33,600).

• • For 2022, housing costs in excess of $17,920 but less than $33,600 can be excluded in addition to the foreign earned income exclusion.
  • A worker whose taxable compensation is less than $112,000 already has all of his or her income excluded by the foreign earned income exclusion.
  • A worker who has taxable compensation of more than $112,000 but housing costs of less than $17,920 does not have sufficient housing costs to claim an additional exclusion for housing cost.
  • A worker whose housing is excluded by the minister’s housing allowance already excludes housing costs from income. (There is no minimum threshold.)
  • A 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 worker whose taxable compensation is more than $112,000, who does not qualify for minister’s housing allowance, and whose housing costs exceed $17,920, 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 Cod
• http://www.irs.gov/Individuals/International-Taxpayers/Foreign-Earned-Income-Exclusion

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: