The first is claiming the Foreign Earned Income Exclusion on Form 2555 and the second is claiming the Foreign Tax Credit on Form 1116. The Foreign Earned Income Exclusion is only applicable to earned income, whereas the Foreign Tax Credit can be applied to both earned and unearned income.
What do you need to know about foreign earned income exclusion?
The Foreign Earned Income Exclusion (FEIE) is the most common—and arguably the most widely used—tax benefit for U.S. expats, allowing Americans to exclude all or a portion of their foreign earned income from their U.S. taxes. Before you jump on board with claiming the FEIE, there are a few big things you should know:
Can a married expat exclude foreign earned income?
Married US expats can each exclude the Foreign Earned Income Exclusion amount, assuming that they both have earned income and meet the IRS tests for living abroad described below. Expats should note that the Foreign Earned Income Exclusion can only be used to exclude certain types of income however (see below for details).
Do you have to pay taxes on foreign earned income?
The exclusion can apply regardless of whether any foreign tax is paid on the foreign earned income, provided certain tests are met. Generally, for an individual to qualify for the FEIE, a “tax home” must be maintained in a foreign country and either the Bona Fide Foreign Resident (BFR) or Physical Presence Test (PPT) must be met.
Do you have to file Form 2555 for foreign earned income exclusion?
However, you may qualify to exclude from income up to an amount of your foreign earnings that is adjusted annually for inflation.” – the IRS To claim the Foreign Earned Income Exclusion, expats must file form 2555 when they file their federal tax return. They must also meet IRS criteria for living abroad to qualify.
