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If you thought it was hard to move from one state to another for tax purposes, wait until you see what’s involved with moving outside the US.
The foreign earned income exclusion is a significant tax loophole for those living outside the US.
First, know your tax obligations in your new country of residence.
Some countries have higher tax rates than the US. Make sure you understand what you’re getting into.
You DO NOT want to be jumping from the frying pan into the fire.
In 2022, you can exclude up to $112,000 per person from US tax. For married filing jointly where both work, it would be double that amount or $224,000 on the return.
To qualify for this, the income must be earned, and it can’t be passive or earned inside the US.
You need to either meet the physical presence or the bonafide residence test.
The physical presence is an objective test. You must be physically present in a foreign country (or countries) for 330 full days during 365 days. If you have a day that is part US and part outside the US, it counts as a US day. It doesn’t need to be the entire year in question, but at least part of that year must be included.
Bona Fide Residence
The bona fide residence test, on the other hand, is more of a subjective test, and you must prove your domicile is outside the US.
Generally, that is done by having the appropriate residency visa for the foreign country.
You’re not a tourist when you have a resident visa.
You don’t have the same restriction on day count, but it’s generally expected that you will spend less than 120 days in the year in the US. More than that, you need to have the intent to show that you will return. The US is not your home, and your other residence is your home.
Besides the foreign earned income exclusion, you also can get a foreign housing allowance. The amount you can take for this depends on a formula based on where you live outside the US and how much foreign earned income exclusion you have.
This is a deduction that is taken outside the regular itemized deductions.
This isn’t an automatic exclusion and deduction, and you have to apply for them with the appropriate forms when you file your Form 1040, Individual Income Tax Return. Make sure you work with experienced tax professionals who understand foreign income exclusion, foreign housing allowance, and foreign tax credits.
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