Claiming the Foreign Earned Income Exclusion

Today's tax question comes from Greg in Thailand. He asks:

"Considering that I meet all other requirements, do I have to pay income taxes in a foreign country to qualify for the foreign earned income exclusion?"

US citizens and resident aliens who live and work abroad can exclude up to $80,000 per year from their US federal income taxes through the foreign earned income exclusion. To qualify for the exclusion, you must reside in another country or countries for at least 330 full days out of the year under the physical presence test. You can also qualify if you reside in a foreign country for a full calendar year under the bona fide residence test. If you submit a statement to the foreign government that you are not a resident and that you are not subject to their tax laws, you will not qualify for the exclusion under the bona fide residence test.

So, do you need to pay taxes to a foreign country? That depends. Some countries have no tax laws at all, and others provide generous tax benefits to expatriates working in that country. As a result, it definitely pays to work with an experienced tax professional who can advise you about the best way to structure your US and foreign tax obligations. Besides the foreign earned income exclusion, expatriates can also take advantage of the Foreign Tax Credit and various tax treaties.

Expats also need to be very aware of another reporting obligation they have. US citizens who have over $10,000 held in foreign banks need to file Treasury Department Form 90-22.1 by June 30th of each year to report on the location and value of their accounts. There's even a potential $10,000 penalty for filing this form late, along with other penalties that might be imposed. You need to file this form, even if it's late. In fact, I've helped many clients file this form, even years late, and avoid the $10,000 penalty and, more importantly, avoid any money-laundering audits.

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