As a U.S. citizen or resident alien working in a foreign country, you may be wondering how your foreign earned income is subject to U.S. income tax laws. In this FAQ, we will provide a clear and concise explanation of foreign earned income and its tax implications, as well as outline the benefits available to eligible taxpayers under IRC 911.

Source: IRM 21.8.1.2.16.3 (10-01-2018)

What is Foreign Earned Income?

Foreign Earned Income is the income you receive for personal services performed in a foreign country or countries while meeting the requirements of IRC 911. U.S. citizens and resident aliens living and working in a foreign country are subject to the same U.S. income tax laws as those living and working within the United States.

Example: A US citizen working as a teacher in Spain receives a salary for their services performed in Spain. This income is considered foreign earned income and can potentially be excluded from their US income tax liability, subject to meeting specific requirements.

Can I Exclude Foreign Earned Income from My Gross Income?

Yes, if you meet the requirements of IRC 911, you may elect to exclude some or all of your foreign earned income from your gross income. In addition, you can separately elect to exclude or deduct your foreign housing expenses from your gross income.

How Do I Claim the Foreign Earned Income Exclusion?

To claim the foreign earned income exclusion, you must file Form 2555, Foreign Earned Income, along with your Form 1040. By completing and submitting this form, you can elect to exclude some or all of your foreign earned income, provided you meet the necessary requirements.

Example: A US citizen who works as an engineer in Germany and meets the requirements of IRC 911 may file Form 2555 with their Form 1040 to claim the foreign earned income exclusion. This can help them save on their US income tax liability by excluding a portion or all of their income earned in Germany.

Does the Foreign Earned Income Exclusion Apply to Civilian Employees in Combat Zones?

Yes, civilian employees working in combat zones are subject to the same rules and must complete Form 2555, Foreign Earned Income, to elect the exclusion of some or all of their foreign earned income. This is in line with the guidelines provided in IRM 5.19.10.6.1(7), Combat Zone Exclusion of Income.

Can a Nonresident Alien Taxpayer Qualify for the Foreign Earned Income Exclusion?

A nonresident alien taxpayer who has a U.S. citizen or resident alien spouse and elects to be taxed as a U.S. resident alien could qualify for the foreign earned income exclusion under the physical presence test if the required time is met.This means that the nonresident alien must have been physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.

Understanding foreign earned income and its implications is crucial for U.S. citizens and resident aliens working abroad. By meeting the requirements of IRC 911 and filing the appropriate forms, taxpayers may be eligible to exclude or deduct their foreign earned income and housing expenses from their U.S. taxable income. This simplified guide aims to provide a better understanding of this complex tax concept and help taxpayers navigate the U.S. tax system more effectively.