Tax Facts

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.

There is only one change to this law that was implemented with the new Tax Cuts and Jobs Act of 2017, which goes into effect this tax season for 2018 calendar year. The change is minor, specific and simple to understand. It benefits only those who are working in an area designated by the President of the U.S. by Executive order as a combat zone for purposes of section 112 in support of the Armed Forces of the United States. These areas can be looked up online. It is clear where they are and you either were working in one or not. If you were working in such a combat zone as designated, then and only then can an exception be made to the domestic home qualification. In such a case, you can have a domestic home in the United States while you are in the foreign country working, and still take the exclusion. However, you must still meet the substantial presence test (mentioned above) and the tax home requirement.

The requirements are clear and simple to understand. If you do not meet any one of them, you cannot take the foreign earned income exclusion and you must pay taxes on your income just like everyone else who works in the United States.


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