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Foreign Earned Income Exclusion

by David Tzimenakis July 17th, 2018
Income Tax Refunds

To claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction:

you must have foreign earned income, your tax home must be in a foreign country, and you must be one of the following:

The maximum amount of the Foreign Earned Income Exclusion under Internal Revenue Code (IRC) section 911 is indexed to inflation

Not foreign earned income

Foreign earned income does not include the following amounts:

Self-employment income

A qualifying individual may claim the foreign earned income exclusion on foreign earned self-employment income. The excluded amount will reduce the individual’s regular income tax, but will not reduce the individual’s self-employment tax. Also, the foreign housing deduction – instead of a foreign housing exclusion – may be claimed.

Foreign Tax Credit

In relation to income types that are ineligible for the Foreign Earned Income Exclusion or for earned income that exceeds the Foreign Earned Income Exclusion limits US taxpayers with foreign source income are able to utilize the Foreign Tax Credit to mitigate the effects of potential double taxation.

This enables eligible foreign taxes to be used as either a deduction from income or as a credit against US tax liability but only up to the amount of US tax liability for the same year.

The credit is not refundable, however, it is able to utilized by carrying it back one year and/or forward for up to ten years.

To make the prior year claim and amended return 1040x must be filed.

To qualify for the Foreign Tax Credit the foreign tax must pass four tests.

  1. The tax must be imposed upon and paid or accrued by the taxpayer.
  2. The tax must be the legal and actual foreign tax liability.
  3. The tax must be an income tax.
  4. The tax must arise from income that is subject to taxation in the foreign country.

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