10 June 2022 3:46

Foreign Earned Income Exclusion – Service vs. Product?

Can you use FEIE and FTC?

It’s possible to claim both the FEIE and FTC, however they can’t be applied to the same income.

Can I switch from FTC to FEIE?

Hence, by using the Foreign Tax credit, one can revert to the FEIE. While the best outcome with the FEIE is a zero tax liability, the FTC generates carryovers for future years. Even if you are moving to a low tax country, you can use such carryovers.

What is excluded from the term foreign earned income?

Not foreign earned income: Foreign earned income does not include the following amounts: Pay received as a military or civilian employee of the U.S. government or any of its agencies. Pay for services conducted in international waters or airspace (not a foreign country)

What is the difference between Form 1116 and 2555?

Form 2555 – Foreign Earned Income, used by taxpayers to claim the foreign-earned income exclusion, housing exclusion, and housing deduction. Form 1116 – Foreign Tax Credit, used by taxpayers to claim a credit against U.S. income tax liability for income taxes paid to a foreign jurisdiction.

How do I qualify for FEIE?

To qualify for the FEIE, you must be one of the following:

  1. A bona fide resident of a foreign country (or countries) for an entire tax year.
  2. Physically present in a foreign country (or countries) for at least 330 full days during any 12-month period.


How do I file FEIE?

You must attach Form 2555, Foreign Earned Income, to your Form 1040 or 1040X to claim the foreign earned income exclusion, the foreign housing exclusion or the foreign housing deduction. Do not submit Form 2555 by itself.

Do I need to file both 2555 and 1116?

To clarify, you can use Form 2555 and Form 1116 on the same return, and you can use Form 2555 and Schedule A on the same return; however, if you claim a deduction you cannot claim a credit and if you claim a credit, you cannot claim a deduction.

Do I have to take the foreign earned income exclusion?

The foreign earned income exclusion is voluntary. You can choose the foreign earned income exclusion and/or the foreign housing exclusion by completing the appropriate parts of Form 2555.

How does foreign earned income exclusion work?

If two individuals are married, and both work abroad and meet either the bona fide residence test or the physical presence test, each one can choose the foreign earned income exclusion. Together, they can exclude as much as $224,000 for the 2022 tax year.

Can I use both foreign income exclusion and foreign tax credit?

While you cannot take the Foreign Earned Income Exclusion and Foreign Tax Credit on the same dollar of income, you can take both in the same year.

What qualifies as foreign earned income?

For this purpose, foreign earned income is income you receive for services you perform in a foreign country in a period during which your tax home is in a foreign country and you meet either the bona fide residence test or the physical presence test.

How does IRS verify foreign income?

One of the main catalysts for the IRS to learn about foreign income which was not reported, is through FATCA, which is the Foreign Account Tax Compliance Act. In accordance with FATCA, more than 300,000 FFIs (Foreign Financial Institution) in over 110 countries actively report account holder information to the IRS.

How can I avoid paying foreign income tax?

If you lived abroad in a foreign country and meet either the Physical Presence Test or the Bona-Fide Resident Test, you may be able to exclude a portion of your foreign earned income from the earned income on your US Tax return, which is known as the Foreign Earned Income Exclusion.

What is not included in taxable income?

The following items are deemed nontaxable by the IRS: Inheritances, gifts and bequests. Cash rebates on items you purchase from a retailer, manufacturer or dealer. Alimony payments (for divorce decrees finalized after 2018)

What are the 5 types of income?

As per the income tax act 1961, one’s income is divided into 5 categories — income from Salary, income from house property, income from business profit, income from investments/capital assets and income from other sources.

What is Section 35D meant for?

Section 35D of the Act was introduced to provide entrepreneurs with the facility to claim deductions for preliminary expenses. Preliminary expenses are expenses which the promoters of a company incur at the time of incorporating the company.