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What is foreign earned income exclusion?

Article ID: 25
Last updated: 12 Nov, 2014
Revision: 5
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By Jason Watson ()

If you are a US citizen or a resident alien of the United States and you live abroad, you are still taxed by the IRS on your worldwide income.

But, if you earn wages as an employee or have self-employment income while working in a foreign country as an ex-patriate or expat, you might be able to exclude up to $99,200 as tax-free income (or 2 x $99,200 or $198,400 if married to another foreign income earner) for the 2014 tax year. This would save you well over $30,000 in taxes (or over $60,000 for couples who both qualify). Extra cheese on your Whopper at the new Tibetan BK.

So, it’s a big deal. It’s an even bigger deal that you take the necessary steps to qualify for the foreign earned income exclusion and its cousins the foreign housing exclusion and foreign housing deduction.

Also, note that it is earned income that may be excluded- wages and self-employment income are the typical examples of earned income. So, dividends, interest, rental income, pensions, etc. are not considered earned income, and therefore do not qualify for the foreign earned income exclusion. More on the definition of earned income later (see What is considered foreign earned income?)

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item What amount can I deduct for foreign earned income exclusion?
item How do partial years work with the foreign earned income exclusion?
item How do I qualify for the foreign earned income exclusion?
item What is a tax home or abode, and how do they relate to each other?
item What is the bona fide residence test?
item What is the physical presence test?
item Are there exceptions to the bona fide residence or physical presence tests?
item Do I have to pass the same test each year?
item What is considered foreign earned income?
item How does the foreign housing exclusion or deduction work?
item If I don't qualify for the housing deduction, can I still deduct expenses?
item Can I deduct mortgage interest paid on my foreign home?
item How do moving expenses affect my exclusion?
item May I deduct contributions to foreign charities?
item May I still make contributions to my IRA as an ExPat?
item What happens if my host country has a form of social security?
item If I am a self-employed ExPat, what taxes am I responsible for?
item Are there any downsides to claiming the foreign earned income exclusion?
item Does voting through an absentee ballot mess up my bona fide foreign residency?
item What are the filing timelines for submitting my ExPat tax returns?
item As an ExPat, do I need to file a State tax return?
item How do tax treaties affect my ExPat situation?
item How do fluctuating currency values affect my taxes?
item How do I handle my foreign rental property?
item What is the difference between foreign tax credit and deduction?
item How do I report my foreign bank accounts (FBAR)?
item Is the Offshore Voluntary Disclosure Initiative (OVDI) still in full swing?
item How do I pay my taxes while living in foreign country without having a US bank account?

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ExPat FAQs - Watson CPA Group       What amount can I deduct for foreign earned income exclusion?