The Best Tax Exemption for Travelers and Expats
If you live abroad or travel frequently, make sure you don’t give Uncle Sam in the United States more money than you should. Foreign Earned Income Exclusion (FEIE) allows a U.S. taxpayer to tax-exclude up to $112,000 of income (2022 figure – adjusted annually for inflation). Sounds too good to be true? Is not. But you will have to jump through some hoops to qualify.
What is FEI?
Income excluded from taxes through FEIE must be “earned abroad”, which does not mean that it must be income paid by a non-U.S. client or company, but rather, it must be received while you are physically outside the United States. USA But don’t rejoice just yet – you can’t go on vacation for two weeks and claim incoming payments during that time through FEIE.
How to qualify for the FEIE
You must also pass the FEIE qualification through either the physical presence test or the bona fide residence test.
- Physical Presence Test: To take the FEIE Physical Presence Test, you must be physically present in another country for at least 330 full days in any 365-day period.
- Fair Residence Test: In order to qualify for FEIE under the Fair Residence Test, you must be a resident of a foreign country or countries for the entire tax year.
Those who successfully qualify can eliminate up to $112,000 in federal tax revenue in 2022, which could result in up to $17,608 in tax savings. Any income that exceeds the FEIE limit is taxed at the marginal tax bracket for that income level.
How to get FEIE
If you qualify or plan to qualify for FEIE, it is recommended that you hire an accountant who specializes in taxes for digital nomads and expats. NomadTax offers customized tax returns starting at $350 and also offers advisory services for nomads and expats who have unique tax considerations.
If you wish to do this yourself, you will need to include Form 2555 on your tax return. You need to collect the following information for Form 2555:
- Which test do you use to qualify (physical presence or bona fide residence)
- Travel dates throughout the year (international and US)
- Previous year Since 2555 (if applicable)
- Foreign income documentation
bottom line
Whether you’ve been a digital nomad for a while or are just now starting to explore post-pandemic remote work options, FEIE is a great way to financially benefit from a location-independent lifestyle. Just make sure you do it right and count your days carefully if you meet the requirements of the physical presence test – you don’t want to end up paying taxes plus interest in the future because you accidentally spent one day in the US for too long.