The Foreign Earned Income Exclusion (FEIE) is a deduction that the IRS allows to certain US citizens and resident aliens living and earning income abroad on a consistent basis.
What is foreign earned income?
Foreign earned income is classed as income from either employed or self-employed work. It does not include passive income from investments such as interest, dividends, IRA distributions or rental income.
A few examples that the IRS (taxpayers) have given includes on what doesn’t qualify as foreign income includes:
· Payments received by working with the U.S. Government or any of its agencies
· Pay in some combat zones
· Pay for service in international waters
· The value of meals and lodging
· Pensions, annuities and social benefits
· Any payment received after the end of the tax year.
Self-employed and FEIE
Self-employed workers can only reduce their income tax through FEIE. The exclusion does not apply to self-employment tax, which covers social security and healthcare insurance. If you reside in a country within the dual taxation/ Totalization agreement you may be exempt from pay social security and self-employment tax.
This amount allowed before US taxation is just over $100,000. US expats are therefore required to pay federal income tax for earnings over the threshold.
In order to do qualify the for the FEIE, you must satisfy either the physical presence test or the bona fide residence, alongside the tax home test.
In order to claim Foreign tax exclusion, you must file a Form 2555 (or a Form 2555-EZ if you do not claim housing deduction).