Tax Facts

Information to help individuals and small business navigate our complex Tax Laws. Not to be construed as tax advice. Contact your hired tax advisor for your specific tax situation and advice.

Foreign Earned Income Exclusion 2018 Tax Season

To enjoy the benefits of the foreign earned income exclusion, you must meet specific requirements that allow you to take this deduction on your tax return. The rules are stringent and clear. You must live in a foreign country for the entire tax year or be present in that country for at least 330 full days of any 12 consecutive months. This is the first requirement. If you do not meet this requirement, then there is no need to determine if you qualify for the other requirement, which is even more stringent.

The second requirement is that you have established two types of homes in the foreign country: a tax home and a domestic home. A tax home means the place where you have a regular place of business. The tax home is easy to meet, since you would not be considering taking the exclusion unless you had a regular job in the foreign country in the first place. The domestic home is not so easy to meet.  A domestic home is where you have an economic, family and community interest. So, this means you not only work in that foreign country, but your family has joined you there, you purchased a car there and relinquished your car in the United State (or put it in storage), you obtained a driver’s license and a library card, opened bank accounts and joined local leagues and civic associations all in the foreign country. Your spouse and children, if you have any, have joined you there and have done the same.

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Foreign Earned Income Exclusion

Are you, or your spouse a U.S. citizen, living and working abroad?  If so, you are most likely familiar with the foreign earned income exclusion.  That's great.  But do you know the requirements for taking such an exclusion?

There are two tests to determine if you meet the minimum requirements for taking the exclusion.  One is the bona fide residence test and the other is the physical presence test.

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Offshore Income

Do you have money in a foreign bank account?  Are you a U.S. citizen, resident alien, or nonresident alien?  If so, you are required to report to the IRS worldwide income from all sources, and yes, that includes foreign financial accounts.  You also have to pay taxes on income from those accounts.

There are particular forms to fill out and attach to your tax return, if you have such foreign accounts.  Part of what you are required to report is the country in which each account is located.  Additionally, if the aggregate value of all the foreign accounts exceeds $10,000 at any time during the year, you are required to report that information on a special form called the Report of Foreign Bank and Financial Accounts form, also known as the FBAR.

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