U.S. citizens and resident aliens (“green card” holders) must pay taxes on worldwide income. This means that, even if they do not live and only earn income outside the U.S., they must (1) file an annual tax return AND (2) pay taxes on any income they earn (regardless of where they earned it). But there is some relief. Congress allows U.S. citizens and resident aliens to not pay Federalincome taxes on up to US$102,100 of foreign earned income per year. But, be careful – it does not apply to all income and does not exempt them from all taxes. They can only exclude foreign earned income (such as wages and other compensation for services performed outside the U.S.). Also, the exclusion only applies to income tax. Payroll taxes (social security and medicare) are not reduced by this exclusion. Similarly, depending on their state of domiciliation or residency, State income taxes may not be reduced by this exclusion. Finally, there are additional requirements you must meet to avail themselves of this exclusion.
In particular, to qualify for the exclusion, you must be out of the U.S. for 330 days during each 12 month period throughout the tax year or qualify for a bona fide foreign resident test for the full calendar year. The 330-day test is simple math… be out of the U.S. and you qualify. It doesn’t matter where you are in the world so long as you’re not in the U.S.
The bona fide residency test is more complex and based on your intentions. You must move to a foreign country for the “foreseeable future.” This new country should be your home and your home base. When you travel, it’s where you return to. It’s where you lay down roots. It’s where you file taxes and where you’re a legal resident (with a residency permit). In most cases, you will use the 330 day test in your first year abroad. That will give you time to secure residency, find your home base and do all the things necessary to break ties with the U.S. Beginning January 1st of year two, you will file for the Foreign Earned Income Exclusion using the bona fide residency test. The reason you want to use the bona fide residency test when eligible is that it will allow you to spend more time in the United States. Under the 330 day test, you can only spend all of 36 days a year. If you qualify for the residency test under the foreign earned income Exclusion for 2018, you can spend 4 or 5 months a year in U.S. Just remember that it is only foreign earned income (earned income for services performed outside the U.S.) that can take advantage of the exclusion.I hope you’ve found this article on the Foreign Earned Income Exclusion for 2018 to be helpful. For more information on any expat tax concerns please log into our webpage: www.lagattatax.comor contact me at Stephanie.lagatta@lagattatax.com or call (51) 949-968-555. All consultations are free and confidential.
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