In recent years the U.S. government has vigorously enforced tax regulations ensuring that U.S. citizens or nationals are properly reporting their foreign earned income. The number of disclosure and other programs has dramatically increased to allow qualifying taxpayers an avenue to maintain or regain compliance with these regulations. As most are aware, Americans are required to report and pay taxes on globally earned income. While this can be a frustrating reality, the good news is the IRS offers tax credits to qualifying individuals to reduce their overall tax liabilities. The most prominent of these credits, the Foreign Earned Income Exclusion, offers qualifying individuals’ significant savings on their U.S. tax returns. To help clients, prospects and others understand the exclusion, JLK Rosenberger has provided a summary below.
There are several qualifications that must be met in order to qualify for the exclusion. It’s important to note that this benefit is primarily designed to benefit those U.S. persons living and working overseas. As a result, a taxpayer must have foreign earned income, classify their tax home in a foreign country and meet one of the following criteria for status:
- U.S. citizen who is a bona fide resident of a foreign country for an uninterrupted period that included an entire tax year (bona fide residence test);
- U.S. resident alien who is a citizen or national of a country the U.S. has a tax treaty with and who is a foreign country resident for an uninterrupted period that included an entire tax year;
- U.S. citizen or resident alien who is physically present in a foreign country for at least 330 full days for any period of 12 consecutive months (physical presence test).
Total Tax Benefit
The maximum allowable benefit changes each year as it is adjusted annually for inflation. For the 2014 tax year, the maximum amount of income which can be excluded was $99,200 per person. In the case of a married couple that meets either the bona fide residence or physical presence test then together they can receive a maximum exclusion of $198,400. The maximum benefit for 2015 has not yet been released by the IRS but will be forthcoming over the next several months.
The Foreign Earned Income Exclusion is a compelling incentive for qualifying individuals. However, determining qualification and how much of the incentive to claim can be complex. For this reason it’s important to work with a provider familiar with these regulations. If you have questions about the exclusion, JLK Rosenberger wants to help! For additional information on the Foreign Earned Income Exclusion or other such programs, please contact us at 949-860-9902, or click here to contact us. We look forward to speaking with you soon.