Qualifying For The Foreign Earned Income Exclusion
If you are living and working abroad, you have to pay taxes in that country and the United States as well. Qualifying for the Foreign Earned Income exclusion is the only way to get relief.
We live in a global economy. It is now fairly common to take a job in a country other than the United States. This creates a bit of a mess from a tax perspective. Why? As a citizen of the United States, you are responsible for paying taxes on your income regardless of where it is earned.
You can see how this could cause a huge problem. Assume you take a job in Germany. Your employer is going to withdraw money from your paycheck to pay the German taxes. Now the United States wants its chunk? There will be nothing left! This is where the Foreign Earned Income exclusion comes in.
As the name suggests, the IRS will give you a pass on part of the income you earn abroad. For the 2008 tax year, the exclusion is up to $87,600 per person. This means that you do not have to pay taxes to the United States on your first $87,600 in income while working abroad. The amount of the exclusion changes every year, so make sure to check with the IRS if you are filing for a year other than 2008.
You need to meet certain requirements to qualify for the exclusion. There are two tests and you just have to pass one. The first is the bona fide residence test and the second is the physical presence test. Let’s take a quick look.
The bona fide residence test is very simple. If you reside in the foreign country in question for a full calendar year, then you satisfy the test. This means you need to be there from January 1 through December 31st. Remember, passport records are now digitized so don’t claim you passed this test when you really didn’t.
The physical presence test takes a different approach. If you were living in foreign countries a total of 330 full days out of 365 consecutive days, you meet the test. Of importance, you do not need to stay in one country. You just need to stay out of the United States for this period of time.
You still have to file taxes in the United States if you work internationally. By qualifying for the Foreign Earned Income exclusion, you can minimize the pain.