Knowing how to reduce tax liability can be a boon to Americans who move or work abroad.
Americans living abroad are required to file annual tax returns with the Internal Revenue Service (IRS). This requirement can come as a surprise to those who assume no return is required while they are abroad. Just as surprised are those who are residents of other countries, but hold U.S. citizenship, who learn they are out of compliance for failure to file tax returns, or reports required to track foreign bank accounts (like FBARs).
While the requirement to file and pay U.S. taxes angers many an expat, there is an important program that can ease the tax burden. The Foreign Earned Income Exclusion (FEIE) is a structured program that offers tax relief to qualified U.S. citizens. You may be able to reduce tax liability by excluding some income and expenses from your income tax return. Here are some points about the FEIE:
- The FEIE is available to American citizens under particular conditions. One condition is uninterrupted residence abroad for a tax year. Another is a U.S. resident alien, or foreign national, living within a country that has a tax treaty with the U.S.—and who also resides abroad uninterrupted for the span of a tax year. The third option is for a U.S. citizen or U.S. resident alien who resides abroad for at least 330 days during any 12 consecutive months. The time requirements are considered very seriously by the IRS, which has designated how a full day can be accounted for under the FEIE.
- Proof of physical presence or qualification of bona fide residency is required before a FEIE is recognized by the IRS. The physical presence test is rigorous and requires residency or presence in a foreign country, and prescribes how you may count 330 days even in air travel over a foreign country after leaving the U.S. on the way to your foreign destination. The bona fide residence test requires uninterrupted residence in a foreign country. Brief trips to the U.S. are permitted as long as the traveler has a straightforward return to their country of residence.
- If you have an interest in the FEIE, keep accurate records of your travels and residency in the event you are audited. If you qualify for the FEIE, the maximum exclusion of tax for 2022 is $112,000 per individual. If a married couple meets the physical presence or bona fide residence test, each can take the exclusion for a total of $224,000 this year. Be sure to report your total income on your U.S. tax return(s).
The FEIE is a good deal accompanied by fine print. When you have questions about qualifying or about offshore tax compliance, speak with an attorney experienced with IRS audits, offshore tax, and tax fraud.
Seasoned legal advice on tax strategies, IRS audits, and tax controversy
The tax attorneys at Robert J. Fedor, Esq., LLC help clients and companies here and abroad respond to compliance challenges, allegations of tax crime, or other tax concerns. When you need responsive, legal advice locally or abroad, contact us or call 800-579-0997. We have offices in Cleveland and Chicago for your convenience.