US Citizen Living Abroad – Have you worked overseas? Have you paid foreign taxes?

Form 2555: Foreign Earned Income Exclusion (FEIE) is a great tax saving opportunity for Americans living abroad, allowing the exclusion of $104,100 in foreign earned income per person in 2018. It allows a US Citizen or resident alien to exempt employment and self-employment income from US Taxation. In order to claim FEIE, income must be earned in a foreign country, and once you choose to exclude your foreign earned income, the election remains in effect for that year and all later years unless you revoke it. In case you have a child, FEIE may not be the best option because refundable portion of Child Tax Credit (CTC) requires non-excluded Earned Income, meaning that you may not get the child tax credits.

You qualify for the tax benefits available to taxpayers who have foreign earned income if both of the following apply.

• You meet the tax home test: To meet this test, your tax home must be in a foreign country, or countries, throughout your period of bona fide residence or physical presence, whichever applies. For this purpose, your period of physical presence is the 330 full days during which you were present in a foreign country, not the 12 consecutive months during which those days occurred.

• You meet either the bona fide residence test or the physical presence test: To meet this test, you must be a U.S. citizen who is a bona fide resident of a foreign country, or countries, for an uninterrupted period that includes an entire tax year (January 1–December 31, if you file a calendar year return)

Form 1116 – Foreign Tax Credit

You can file this form to claim the foreign tax credit if you are an individual, estate, or trust, and you paid or accrued certain foreign taxes to a foreign country or U.S. possession. One advantage of taking foreign tax credit is that it allows a carryback and carryover. For example, you decided to claim Foreign Tax Credit on Form 1116 but you can’t apply credit against the full amount of qualified foreign income taxes that you paid or they accrued in the year. In this case, you can carry back for one year and/or carry forward for 10 years the unused foreign income tax.