The US Foreign Earned Income Tax Exclusion
Disclaimer: for informational purposes only. We highly encourage you to speak with tax professionals.
The US taxes citizens regardless of where they live. The Foreign Earned Income Tax Exclusion (FEIE) combined with the housing exclusion allows you to exclude about ~$130,000 of that income from federal taxes.
**FEIE even applies to w2 income from US companies!
There are two ways to qualify for the FEIE:
- Physical presence test: this is the clearer way. Spend 330 full days abroad during a 365 day period. Note, can use during any 365 day window (eg, jan 1st 2022 to dec31 2022 or apr1 2022 to march 31st 2023). If you don't yet have a 365 day window that qualifies as of April of that tax year, consider filing a tax extension to October.
- Bona fide test: Lets you spend more time in the US. Perhaps as long as 4-5 months. Must qualify by December 31st of the tax year before you apply. The IRS does not provide clear guidance on how to meet this test. Fortunately many US courts have ruled on the bona fide residency test. They look for:
- legal residence in country you claim as bona fide home
- strong ties to the country. This could be several things. Good to learn the language, join social groups. Perhaps get a driver's license and library card.
- several court cases established that you do not need to pay taxes to your new country in order to qualify as a bona fide resident for US tax purposed.
Regardless of which test you qualify under, you cannot have your primary abode in the US. Your move abroad can't look like a planned finite stay abroad. It must have the potential to be permanent even if ultimately you eventually move back to the US.
- If you own property, lease it out to a non-family member
- If you have cars, best to sell them
- Avoid having a storage unit
IRS Guidance https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion.
This book by a lawyer who specializes in expat taxes provides excellent guidance and cites every single US court case.
Tip: if your spouse also works, they can claim the FEIE exclusion separately.
Other US Taxes
- State taxes: become a tax resident of a zero income tax state (eg TX, FL, TN, NH etc.) or cease being a resident of any state.
- Withholding taxes (ie Social Security and Medicare):
- No US withholdings: Employees of foreign companies are exempt
- Half withholding (7.65%): Employees of US companies pay half (7.65%) while their company pays the other half
- Full withholdings (~15.3): Self-employed people
- Capital gains taxes: there is no way out of these taxes. Low income tax brackets are exempt from long-term capital gains taxes though. And even high income earners don't owe that much.
Consult with a tax professional to see if you qualify for the FEIE. If you qualify, hire an accountant or professional tax preparer to prepare your tax filing.