What is the Foreign Earned Income Exclusion Act (FEIE)
And how can you use it to save/get back thousands of your hard earned dollars.
This article will be informative: I want to lay the ground information for future blog post. - I am not a financial advisor and none of this information is financial advise.
Feel free to consult the official IRS Page
https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion
The Foreign Earned Income Exclusion (FEIE) is a tax benefit offered by the United States government to Americans living and working abroad. It allows eligible individuals to exclude up to a certain amount of their foreign earned income from being taxed by the IRS. If you're an American expat or planning to become one, the FEIE can be an incredibly valuable tool in reducing your tax burden. Here's what you need to know about how to use the FEIE.
** Even if your job pays you USD to an American bank account - So long as you are outside of the U.S - Your income is foreign earned because you performed your duty outside of the US.
Firstly, it's important to understand the eligibility requirements for the FEIE. To qualify, you must meet either the Physical Presence Test (PPT) or the Bona Fide Residence Test (BFRT).
The PPT requires that you spend at least 330 days out of a 365-day period in a foreign country.
*You will be asked the exact dates that you were outside of the country. I suggest you keep these receipts logged.
The BFRT requires that you establish a "tax home" in a foreign country and show a clear intention to reside there indefinitely.
Once you meet one of these tests, you can exclude up to $112,000 (as of 2022) of your foreign earned income from being taxed.
*** $120,000 for 2023
*The PPT will be easiest for most people, unless you have residency in the country your living in.
To take advantage of the FEIE, you'll need to file Form 2555 with the IRS. This form allows you to claim the exclusion for the tax year in which you earned the income. You'll need to provide information on your foreign earned income, as well as proof that you meet one of the eligibility tests. Keep in mind that you'll need to file this form every year in which you want to claim the FEIE.
**You can do this extremely easy with TurboTax - I takes 10-15 extra minutes, all of the boxes,instructions and math will be done for you, so you don’t fuck up.
It's also important to note that the FEIE only applies to earned income, which includes wages, salaries, and self-employment income. It doesn't apply to investment income, such as dividends or rental income. If you have both earned and investment income, you may still be able to use the FEIE to exclude a portion of your total income from being taxed.
Finally, it's important to keep accurate records of your foreign earned income and the time you spent living and working abroad. This will help you accurately calculate the amount of the exclusion you're eligible for and ensure that you're meeting the eligibility requirements.
If you make 112k a year.. You pay around 17k in federal income taxes.
If your a digital nomad, or simply working remote in latin America.. then you know that 17k could carry you an extra year.
By meeting the eligibility requirements, filing the appropriate forms, and keeping accurate records, you can exclude up to a certain amount of your foreign earned income from being taxed by the IRS. If you're an American expat, it's definitely worth exploring whether the FEIE can help reduce your tax burden.
If you wanna pull the trigger and get residency in Mexico — Read my post below
