Learn how to reduce your foreign-source income tax by up to $104,100 in 2018

American expatriates use the Foreign Earned Income Exclusion to reduce or eliminate their U.S. federal income taxes on foreign-source wages and self-employment income.

If you reside and work outside the U.S. and meet either the bona fide resident or physical presence test, you may qualify for this exclusion. Claiming the Foreign Earned Income Exclusion makes you eligible to exclude up to $104,100 in foreign earned income for the 2018 tax year.

It’s important to know that the Foreign Earned Income Exclusion applies to income resulting from performing services as an employee or as an independent contractor. Your self-employment income can also qualify for the Foreign Earned Income Exclusion. However, it doesn’t reduce the self-employment tax.

Bona fide residence vs physical presence test

You’re considered a bona fide resident of a foreign country if you reside in that country for “an uninterrupted period that includes an entire tax year.”

A tax year lasts from January 1st through December 31st. So by necessity, the qualifying period for the bona fide residence test must include one full calendar year.

Trips or vacations outside the foreign country won’t jeopardize your status as a bona fide resident, as long as the trips are short and you clearly intend to return to the foreign country where you were living.

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Complete IRS Form 2555 or Form 2555-EZ to apply for the Foreign Earned Income Exclusion

Both Form 2555 and Form 2555-EZ will work when it comes to claiming the Foreign Earned Income Exclusion.

The difference between the two forms is primarily the level of difficulty in completing the forms. If you are preparing your own taxes, you may gravitate toward the “EZ” option since it’s easier and has fewer pages to complete.

You’ll need the following in order to fill out Form 2555-EZ:

• your employer’s name and address;
• your international travel calendar, including days you might have worked in the US;
• your Form 2555-EZ from the previous year (if available);
• your foreign income earnings statements.

Each expat is required to complete their own Form 2555-EZ.

For example, if a husband and wife are working and living abroad, they’ll need to complete two forms to attach to their joint US expat taxes. Most of the information will likely be the same if they live and travel together. With that said, the IRS will consider each Foreign Earned Income Exclusion claim separately.