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.

Jose Garcia