Do you travel frequently, spend a lot of time working abroad and earn money while abroad? If so, you may currently be paying a bit more tax than you need to! The Foreign Earned Income Exclusion (FEIE) may help you to exclude thousands of dollars from US income taxation!
When you qualify for Foreign Earned Income Exclusion you can benefit from tax deductions on travel earnings up to $112,000 which would potentially lead to tax savings of up to £17,000. (Income that is above this tax limit will be taxed by the IRS at the marginal rate for your income tax bracket.)
Discovering whether you qualify for FEIE is essential if you are looking for the best tax deductions for travel earnings and to make the most of the money you have earned while you are abroad.
Below we will take answer the question - "What is Foreign Earned Income Exclusion?" and look at what you need to do to qualify for this travel tax exclusion.
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What is Foreign Earned Income Exclusion?
FEIE will allow exclusion from tax on income up to $112,000 which has been foreign earned. This amount adjusts each year depending on inflation. Foreign earned income counts as money you have earned while physically outside of the United States and doesn't apply to money that has simply been paid by a company or client outside of the US.
There are several requirements you will need to meet before you can start excluding foreign employment income and not everyone is applicable based upon factors such as the amount of time spent abroad and how the money was earned.
How Do You Qualify for Foreign Earned Income Exclusion?
To be able to claim foreign earned income exclusion you will need to qualify either through a Bona Fide Resident Test or a Physically Present Test.
What is the FEIE Bonafide Residence Test?
To qualify for the FEIE Bonafide Residence Test you will need to have been a resident of one or more foreign countries for a complete tax year.
What is the FEIE Physical Presence Test?
In order to be able to apply exclusion tax rates on your foreign earnings, you will need to have been physically present in a country outside of the US for a minimum of 330 full days within an overall period of 365 days.
How Do You Apply for Foreign Earned Income Exclusion?
To apply for Foreign Earned Income Exclusion you will need to complete Form 2555 and submit it with your tax return. To complete the form, you will need to provide proof and documents including:
- Whether you qualify for FEIE through the Physical Presence test or Bona Fide Residence Test.
- The dates of your travel and residence throughout the previous year (including your US and International residence dates.)
- Your Form 2555 from the previous year if you had one.
- Documentation about your foreign income.
Start Applying For FEIE by Contacting a Specialist Accountant
To make sure that you qualify for FEIE the best step would be to contact your accountant who will be an expert in assessing your travel earnings and assessing whether they qualify for Foreign Earnings Income Exclusion.
If you are living a digital nomad lifestyle and earning your money while traveling outside the US, it can be difficult to work out exactly which taxes you need to pay and which tax exclusions you qualify for.
You can save money by using an accountancy consultancy service such as NomadTax which helps you with your tax returns and ensure that you are adhering to rules and regulations while living and working abroad.
Summary: What is Foreign Earned Income Exclusion? Travel Tax Tips
Post-pandemic, more and more people are relating the benefits of a digital nomad lifestyle which will allow you to travel and earn money remotely no matter where you are. But dealing with the tax requirements or both the US and the countries you are staying in can become very confusing and you want to make sure that you don't end up paying tax on your earnings twice if at all possible.
FEIE can help lessen your US tax bill, but you will need to qualify based on the amount of time you have been living and working outside of the US.
As with all tax applications and filings, it is important that you fully understand all the rules and regulations and provide all the information which is required. That includes being accurate with the number of days you have spent abroad - if you have spent too many days in the US to qualify you may face owning taxes with interest applied!
By now you should have a good understanding of the answer to "What is Foreign Earned Income Exclusion?" But, the most reliable way to make sure that you qualify for and have all the information needed for your Foreign Earned Income Exclusion is to consult with an accountant who is an expert in US and foreign tax laws.
FAQs About Tax Deductions for Travel Earnings
Which Should You Apply For - Foreign Earned Income Exclusion or Foreign Tax Credit?
There are varying factors that may affect your decision about whether to apply for Foreign Tax Credit or Foreign Earned Income Exclusion. If the foreign country you are resident in has a lower tax rate than that of the US then applying for FEIE may be beneficial to you. But if the tax rate in your country of residence is higher than in the US, then applying for Foreign Tax Credit may be more advisable and will help you to ensure you don't get taxed twice.
What is an Income Tax Treaty between the US and Foreign Countries?
A tax treaty is an agreement between the US and another foreign country in order to solve the problems of US citizens being taxed twice on their earnings made abroad. This treaty applies both to resident and nonresident US citizens who have earned money while working abroad for a qualifying period.
The US has established tax treaties with several different foreign countries and the particulars can vary from location to location.
A US citizen who earns money while resident in a qualifying tax treaty country may face reduced taxes because they are also paying taxes to the US on the same amount. Because of this tax treaties are generally viewed as an effective way to lessen your foreign tax payments rather than reduce your US tax charges.
A non-resident US citizen may see their US taxes reduced or eliminated altogether, within certain limits, and when meeting specific requirements.
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