Understanding the Foreign Earned Income Exclusion

Do you pay taxes in the United States, but live in another country? If so, then you may qualify for the foreign earned income exclusion. Under the rules of this exclusion, you may be able to exclude some or, in some cases, even all of your income, from United States taxation. 

Are You a Real Resident?  

One way to qualify for the foreign earned income exclusion is by being a legitimate resident of a foreign country. What does that look like under IRS rules? Well, for one thing, you must have lived in that country for a full tax year. You are allowed to have visited other countries, including the United States, briefly, providing they were truly “trips” and that you intended, at all times, to return to your country of residence.  

Were You Physically Present?  

If you don’t count as a resident of a foreign country, then you may still be able to enjoy the foreign earned income exclusion. If you lived in the country for a minimum of 330 days in a twelve-month period, then you’re likely eligible. The nice thing about the IRS’ “twelve-month period” wording is that it means you do not have to choose a calendar year as your eligibility period. You can choose any 12 month period.  

With that said, however, if you go this route, you may need to space your exclusion amount over different tax years, which would require you to prorate the maximum exclusion allowed for each year based on the number of days you were present in the foreign country.  

Not All Income Counts  

Of course, you must bear in mind that not all income is necessarily eligible for this exclusion. According to the IRS, all eligible income must be earned income, meaning money you made as the result of being an employee or an independent contractor.  

As you can probably already tell, the rules related to the exclusion can be a bit tricky. If you’re having a hard time understanding them, knowing if you qualify, or determining how to claim the exclusion, don’t hesitate to contact a tax professional. In fact, this is highly recommended in any instance where you’re claiming a less common exclusion such as this one.