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Understanding the Foreign Earned Income Exclusion

What Is the Foreign Earned Income Exclusion?

The Foreign Earned Income Exclusion (FEIE) allows U.S. citizens and resident aliens living abroad to exclude a portion of their foreign income from U.S. taxable income. This helps avoid double taxation on income earned and taxed in a foreign country.

Who Qualifies for the Foreign Earned Income Exclusion?

To qualify for the FEIE, you must be a U.S. citizen or resident alien with a tax home in a foreign country. You must also meet one of the following criteria:

• Be a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year.
• Be physically present in a foreign country for at least 330 full days during any 12 consecutive months.

What Is the Maximum Foreign Earned Income Exclusion?

For the 2024 tax year, the maximum exclusion is $126,500. If both you and your spouse qualify, you can each claim the exclusion for a combined total of $253,000. Additionally, you may be eligible for the foreign housing exclusion, which allows you to exclude qualifying housing expenses.

Foreign Earned Income Exclusion vs. Foreign Tax Credit

The Foreign Tax Credit (FTC) allows you to offset your U.S. tax liability by the amount of foreign income tax paid. While the FEIE excludes foreign-earned income from your taxable income, the FTC reduces your tax bill dollar-for-dollar by the amount of foreign tax paid.

How to Claim the Foreign Earned Income Exclusion

To claim the FEIE, you must file a U.S. tax return (Form 1040) and complete Form 2555. If you are not claiming the foreign housing exclusion, you can use Form 2555-EZ. Be prepared to provide information about your employer, foreign-earned income, residence, and travel dates.

The Bottom Line

If you’re living and working abroad, avoiding double taxation is crucial. The FEIE and foreign housing exclusion provide valuable tax relief, but understanding these provisions can be complex. Consulting a trusted tax advisor can help you navigate these rules and choose the best option for your situation.

For any mortgage service needs, contact O1ne Mortgage at 213-732-3074. Our team is here to assist you with all your mortgage requirements.

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