The 2023 Foreign Earned Income Exclusion: A Simplified Guide
Introduction
If you're a U.S. citizen or resident alien working abroad, you may be eligible for the Foreign Earned Income Exclusion. This provision allows you to exclude a portion of your foreign income from U.S. taxation. In this article, we'll cover the basics of eligibility and how to claim this exclusion for the tax year 2023.
Eligibility Criteria
U.S. Citizens and Resident Aliens
Must have foreign earned income.
Physical Presence Test
Must be physically present in a foreign country for at least 330 full days during a 12-month period.
Bona Fide Residence Test
Must be a bona fide resident of a foreign country for an entire tax year.
Types of Income
Earned Income
Includes wages, salaries, and self-employment income.
Unearned Income
Includes dividends, interest, and other passive income. Note that unearned income is not eligible for exclusion.
Exclusion Amount
Maximum Limit
The IRS sets a maximum exclusion amount each year.
Partial Exclusion
If you don't meet the full-year criteria, you may still qualify for a partial exclusion.
How to Claim the Exclusion
Form 2555
Complete this form to claim the exclusion.
Part I: General Information
Part II: Physical Presence Test
Part III: Bona Fide Residence Test
Part IV: Income Earned
Form 1040
Report the exclusion on Schedule 1 of your Form 1040.
IRS Guidelines
For detailed guidelines, refer to IRS Publication 54.
Common Mistakes to Avoid
Double Counting Income: Don't claim the same income for both foreign exclusion and U.S. income.
Incorrect Form Submission: Make sure you submit Form 2555 along with your tax return.
Ineligible Income: Ensure that the income you're claiming is eligible for exclusion.
Conclusion
The Foreign Earned Income Exclusion can be a significant tax-saving tool for U.S. taxpayers working abroad. Understanding the eligibility criteria and the claiming process can help you make the most of this benefit. Always consult a tax professional for personalized advice.