Foreign Earned Income Exclusion
Table of Contents
Where can I start if I want to undergo repatriation?
Repatriation is a fairly simple process, however, without the right knowledge and understanding of different tax laws, you stand to lose a lot of money. In times of uncertainty, being back in your home country can be a welcome piece of stability in your life. However, when moving back there are a few hurdles you must first jump through to save you time, and money. This article is specifically concentrated on how your foreign income is affected should you repatriate in the same tax year that you are receiving foreign income of any form.
How do I know if I qualify for Foreign Earned Income Exclusion or Foreign Housing Exclusion?
There are two simple tests that will tell you whether you are eligible for either exclusion. This is either the bonafide residence test or the physical presence test. From the rules below, it is likely that you will receive some kind of deductions or exclusions if you have been working in a foreign country for over a year.
Physical Presence Test
If you are physically present in a foreign country for at least 330 full days during any consecutive 12 month period then you will still be eligible for the exclusions. In the example above, you would be eligible for exclusions under the physical presence test because you were in the UAE from May 1st 2018 to July 24th 2019.
The only time this minimum time allowance is waived is inclusively due to if you must leave a foreign country because of war, civil unrest, or similar adverse conditions in that country.
What US Tax laws apply to me when I repatriate to the US?
If you are a US citizen and you live abroad, you are taxed on your income worldwide. However, you may be eligible for Foreign Earned Income Exclusion and Foreign Housing Exclusion. Whether certain tax laws apply to you depends on how long it has been since you have been a resident within the US.
I want more information about Foreign Earned Income Exclusion
Bona Fide Resident Test
If you are a Bona Fide resident of a foreign country or countries for an uninterrupted period that includes a full tax year then you will be eligible for both exclusions. During this period you are able to make short return trips to the United States on the condition that you early intend to return to your foreign residence without delay (within reason, eg. Grounding weather incidents).
As an example, you were a bona fide resident of UAE from June 13th, 2017, through July 24th, 2019. On September 25th, 2019, you returned to the United States. Since you were a bona fide resident of a foreign country for all of 2018, you also qualify as a bona fide resident from June 13th, 2017, through the end of 2017 and from January 1, 2019, through July 24th, 2019.
However, say you were to return to the United States on April 1st 2018 to meet with your employer and returned a month later on May 1st. You would not qualify under the Bona fide resident test as you did not spend a full tax year in your foreign residence. However, you may still be eligible for exclusions with the physical presence test.
What are the limits for Foreign Earned Income Exclusion?
It is not definitive as it is adjusted annually for inflation. In 2020, the limit for un-taxable foreign earnings was $107,600. If you receive foreign income earnings above that it will be taxed by the US government.
What about any of my end of service benefits?
At the end of most jobs it is likely that you will receive end of service benefits or deferred compensation. Knowing when this is due is key and could mean that if you play you cards well, you won’t get taxed by the IRS on them.
When you are moving back its important to note which state you are moving to and their state tax laws. When you restart your US residency you will be eligible for taxation under any applicable state tax laws, including your end of service benefits. So plan where you will be when you receive these benefits, and if possible, don’t establish residence until after you receive them. This can be through going on holiday in the interim of two jobs or temporarily staying in a residence within the US in a state that does not have these state tax laws.
What if I have foreign residency that I want to sell now that I have moved back to the US?
When receiving payment after selling a house, the same applies as the end of service benefits. If you can avoid establishing residency in a state that has tax laws pertaining to foreign income of any kind then the money you get from selling the house will not be taxed by the US. However if you re-establish residency and are then payed for the selling of the house the money you receive will be eligible for taxation, state law dependent of course.
Who needs to apply for an FBAR (Foreign Bank Account Report)?
Even if you close your foreign accounts you must still disclose your highest balances if you repatriate within the same tax year that the accounts have been closed. If the combined sum of all foreign accounts at their highest balance exceeds $10,000 then an FBAR must be filed. A common misconception is that this limit is for each individual account however it total highest balance across all foreign bank accounts. Failing to file an FBAR can result in a fine of up to $100,000 or 50% of the total balance of the foreign accounts.
To Summarise:
Be aware of when you left and any time where you returned to the US so you are aware of eligibility for foreign earned income exclusion and foreign housing exclusion. Also, take note of when any end of service benefits or when money received from selling your house are paid to you in order to avoid getting taxed on them. Finally, don’t forget when closing down foreign bank accounts that you may need to file an FBAR if the highest balance in all accounts at any time during the tax year exceeds $10,000.
Contact us at Expat US Tax to have an initial free 20-minute consultation regarding repatriation and ways to save you money. We are also able to file tax returns on your behalf should you need it under a pre-agreed fee that won’t be adjusted through the process.
