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Foreign Earned Income Exclusion: Claiming Beyond the Threshold


NSA member since 1991 and trained continuing education instructor, Monica Haven, EA, JD, ATA, ATP, is an expert in tax issues and tax planning for all things foreign, whether you are an American citizen living abroad or an alien who has landed on U.S. soil. Remember, men are from Mars and women from Venus, but taxpayers can be from either (or both)!

Here is her answer to a popular question about the Foreign Earned Income Exclusion:

Is it possible for US citizens living abroad to claim an exclusion in excess of the annual threshold set for the Foreign Earned Income Exclusion?

Yes. The Foreign Housing Exclusion (FHE) may be claimed in addition to the Foreign Earned Income Exclusion (FEIE), resulting in a combined exclusion that exceeds the annual threshold. The FEIE is set at $99,200 in 2014 and is indexed annually for inflation.

US citizens who live abroad continue to have a tax reporting requirement in the US but may, if eligible, exclude a portion of their earned income from wages and self-employment from taxable income.  They must satisfy either the Bona Fide Residence (BFR) test or the Physical Presence (PP) test; each mandating that the individual has lived abroad for a requisite period of time.  In the case of the BFR, the taxpayer must have lived in a foreign country for one full calendar year and, therefore, will only become eligible for the exclusion in the second year after his departure from the US, at the earliest.  He may instead qualify under the PP test if he has lived abroad for at least 330 days in any consecutive 12-month period of time. 

TIP:  A taxpayer may amend a prior-filed return or file an extension to allow the requisite number of days and months to accrue before submitting his return.  However, if he has amassed fewer than the necessary days in any particular tax year, he must reduce the maximum allowable exclusion on a pro-rata basis.

For example, a taxpayer moved to Germany on August 20, 2013 and plans to remain abroad through the end of 2014. He will have been physically present in Germany for at least 330 full days during the 12-month period ending August 20, 2014 but only 134 days in 2013. As a result, his foreign earned income exclusion for 2013 is limited to $35,831 (134 days ÷ 365 days × $97,600).


Additionally, qualified individuals may also claim an exclusion (or deduction, if self-employed) for reasonable housing costs such as rent, repairs, utilities, insurance, occupancy taxes, furniture rental and parking. The exclusion is limited by a government-calculated base amount as well as a maximum threshold; in 2014, for example, only those housing expenses which exceed $43.48/day but are less than $81.53/day are eligible, resulting in a maximum allowable exclusion of $13,888. The IRS allows a greater threshold for taxpayers living in certain high-cost cities.

Using Form 2555 to claim the various exclusions, the taxpayer will be required to claim the housing exclusion first, then reduce his earned income by the amount of FHE claimed, and finally calculate his allowable FEIE based on the reduced income he just computed. If his foreign earned income is sufficiently high, the taxpayer will be able to benefit from a combined FHE and FEIE that might well exceed $99,200 in 2014.


For more topics on foreign tax issues and planning, check out these NSA ConnectED Webinars led by Monica Haven:

Domestic Tax Issues for Non-Resident Aliens

Tuesday, June 7th, 2016
2:00pm - 4:00pm EDT

IRS CE: 2 Hours/Federal Tax Law
NASBA CE: 2 Hours/Taxes 

FATCA reporting

Thursday, June 9th, 2016
2:00pm - 4:00pm EDT

IRS CE: 2 Hours/Federal Tax Law
NASBA CE: 2 Hours/Taxes



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