Reasonably priced housing, cheaper meals and decrease medical prices usually high the checklist when American expats begin speaking about their causes for shifting to a overseas nation.
What many who aspire to the expat life-style – or who’re simply starting to stay it — might not notice is that Uncle Sam has a going-away current for you: decrease taxes.
This present that retains on giving comes wrapped within the 72,000 pages of the US tax code, which accommodates a lot of ways in which People residing overseas pays much less revenue tax, notably the overseas earned revenue exclusion.
The overseas earned revenue exclusion does simply what its identify says: it excludes a portion of annual gross revenue for tax functions, at the moment as much as a most of $91,500. This hefty tax break is accessible solely to expats who can show that they spent a complete tax yr residing outdoors the US. Aircraft tickets, abroad housing contracts and overseas tax receipts are the kind of paperwork the IRS desires to see earlier than granting the F.E.I. exclusion feie.
The F.E.I. exclusion additionally solely applies to what the IRS defines as earned revenue, not unearned revenue or variable revenue, two different IRS classes. Examples of earned revenue are salaries, wages, commissions, bonuses, skilled charges and ideas. Unearned revenue, which is exempt from the F.E.I. exclusion, contains dividends, curiosity, capital features, playing winnings and social safety advantages.
For the reason that overseas earned revenue exclusion applies solely to “overseas earned revenue” the IRS supplies an unambiguous definition of this revenue class:
The supply of your earned revenue is the place the place you carry out the providers for which you acquired the revenue. International earned revenue is revenue you obtain for working in another country. The place or how you’re paid has no impact on the supply of the revenue. For instance, revenue you obtain for work finished in Austria is revenue from a overseas supply even when the revenue is paid on to your checking account in america and your employer is positioned in New York Metropolis.
All of it sounds so easy: transfer to a overseas nation and pay much less in US taxes. Many expats who declare the F.E.I. exclusion are turned down, nevertheless, too actually because they merely misunderstood a key a part of the rigorous qualifying standards