Expatriate Tax Preparation and Understanding Exclusion of Foreign Earned Income
expatriation There's much confusion by what constitutes foreign earned income with regards to the residency location, the location where the work or services are performed, and also the supply of the salary or fee payment. Foreign residency or extended periods abroad from the tax payer is really a qualification to prevent double taxation.
Moreover, foreign source income is for services performed outside the U.S. If a person resides abroad and works for a company abroad, services performed for your company (work) while traveling on business in the U.S. is considered U.S. source income, and isn't subject to exclusion or foreign tax credits. Additionally, residual income from the U.S. source, for example interest, dividends, & capital gains from U.S. securities, or U.S. property rental income, is also not susceptible to exclusion.
Conversely, earned income abroad, and residual income from foreign securities, rental, or other activities abroad, could be excluded from U.S. taxable income, or foreign taxes paid thereon, can be used as credits against U.S. taxes due.
Basically, the IRS recognizes that income earned abroad is taxed by the resident country, and may be excluded from taxable income through the IRS if the proper forms are filed. The source of the income salary taken care of earned income doesn't have bearing on whether it is U.S. or foreign earned income, but rather in which the work or services are performed (as with the example of a worker working for the U.S. subsidiary abroad, and receiving his salary in the parent U.S. company from the U.S.).
So, Who Qualifies for Exclusion?
Generally there are two methods of expatriates to qualify for exclusions of foreign earned income:
Probably the most straight forward way is to file for a special form any time throughout the tax year for postponement of filing that current year until a complete tax year (usually calendar) continues to be completed in a foreign country because the taxpayers principle place of residency. This is typical because one transfers overseas in the center of a tax year. That year's tax return would only be due in January following completing the following twelve month abroad following the year of transfer.
The 2nd strategy is to be overseas any 330 days in each full 12 month period abroad. These periods can overlap in the event of a partial year. In this case the filing deadline follows the completion of each twelve month abroad.