At first, the Foreign Earned Income Exclusion might seem a potentially useful tool indeed in the tax-paying toolbox of Americans who are resident overseas. After all, notes Toronto-based citizenship lawyer and American expat rights campaigner John Richardson, in his preface to a just-posted set of online podcasts on the FEIE, it "allows you to exclude – Exclude! Exclude! – US$102,000 a year of income from your tax return!"
In fact, though, the FEIE is not anything like the solution to the long-suffering expat taxpayer's problems this statement suggests it might be, he, and four other participants in the three podcasts, go on to agree...
These other participants include Karen Alpert, a Brisbane, Australia-based academic and tax expert who oversees a blog entitled FixtheTaxTreaty.org; Laura Snyder, the France-based expat representative on the IRS's Taxpayer Advocacy Panel, which works alongside the office of the National Taxpayer Advocate; Suzanne Herman, an American expat rights campaigner and dual U.S./Canadian citizen from birth, now resident in Vancouver, Canada; and Keith Redmond, a Paris-based campaigner for American expats and so-called accidental Americans for the past nine years.
According to Richardson, the Foreign Earned Income Exclusion has survived on the statute books for decades primarily because it is seen as a way to make it possible for American corporations to afford to have American employees who live outside of the U.S., rather than having to hire foreign workers, who would otherwise be significantly cheaper.
To make use of it, the individual in question has to prove that they are either a "bona fide resident" of the country they are now claiming to be living in for an uninterrupted period of at least one year, or that they meet the so-called "physical presence test", meaning that they have been "physically present" for 330 full days over a period of 12 consecutive months. If they can do this, they then attach a "Form 2555 or Form 2555-EZ to their tax return, when they file it.
One of the big problems for Americans living abroad with the FEIE, Alpert explains, is that, as the name implies, it applies only to "earned income" – "the money you get from being an employee, or running your own small business", for example.
But if, say, "you are receiving disability payments, or foreign welfare, or a pension, or you’re living off of your retirement savings…none of these things are [considered] earned income and none of them qualify for the exclusion," Alpert adds, before going on to discuss other aspects of the FEIE that cause it to fall short of solving many of the tax issues expat Americans typically face.
The three podcasts, which also address such related American tax topics as foreign tax credits, double taxation, and how Americans resident overseas can end up having to pay tax to Uncle Sam on income that the country in which they currently reside doesn't tax them on, may be found by clicking here.
Each is around 15 minutes in length.
The first one is entitled "U.S. Taxation of Americans Abroad: Does the FEIE (Foreign Earned Income Exclusion Work)? – Sometimes yes and sometimes no"; the second is "US Taxation of Americans Abroad: Do The Foreign Tax Credit Rules Work? - Sometimes yes and sometimes no", and the third is "U.S. Taxation of Americans Abroad: The confusing world of foreign tax credits, and why Americans abroad may pay more tax than their neighbours and more than Homeland Americans".
To read a blog posting by Richardson, the above-mentioned moderator of the three podcasts, on the origins of the FEIE, click here.
- Aussie group Let's Fix the Aussie/U.S. Tax Treaty! urges expats to submit comments to Oz gov't
- AARO expat survey: U.S. expats struggle even more than folks back home to save for retirement
- Bright!Tax's Madeline Beuoy: 'What expats should do if they miss (Friday's) Oct. 15 expat tax-filing deadline'
- AXFNJ Podcast: John Richardson and Frost Law's Eli Noff look at the filing of 'delinquent' taxpayer info
- As AAA announces its new legal challenge to go ahead, expats echo its call for renunciation to be made easier