Foreign Earned Income Exclusion for US taxes

   Some of us living out of the US have earned income which must be reported to the IRS. But there is a way to reduce the amount we pay in income taxes. Let’s do it.

   The key is to be out of the US for any 330 days anytime during any twelve month period. IRS Form 2555 is used to compute the exclusion and is filed with our form 1040.
We may exclude the portion representing the time out of US. Earned income usually appears on IRS Schedule C and does not include passive interest, dividends, pensions, etc.

Up to $92,900 may be excluded in 2011. This increases with inflation. Some foreign housing and living expenses may also have favorable tax treatment. Our passport records hold the information on our time out of the US.

Maybe an example will clarify my prose:

   Sue and I moved to Equador in November 2010. We made trips home in April and  October 2011 for 4 weeks each time. So it appears that we were in the US for eight weeks or 56 days. Oops, that’s more than the 35 days allowed. But consider the words “any twelve month period.” This is not limited to the calendar year. Or to the April 15 tax deadline – extensions are allowed. We filed for the automatic six month extension.

So here is how our time and exclusion worked out:

   Starting the day we returned from our first trip home, April 29, 2011 we added 365 days. We were in the US for 27 days in October and for the last half of April 2012 (another 3 week visit home). That’s too many days during twelve months. Try again.
   Let’s start April 18, 2011 and end the day we left for the US on April 17, 2012  (arriving April 18). Now we have the last 4 days of our April 2011 trip and none of our April 2012 trip, plus 27 days in October in the US. Total days in US = 31.
   Ignore my confusing math. The point is we may pick our days to find 330 days out of the US. It turns out we were out of the US for about eight months of calendar 2011, so we exclude 8/12 or 67% of earned income.We were able to slide our twelve month computation into the following tax year, even though it resulted in only eight months during 2011.

Yes, I recommend professional tax advice on these issues. Just remember the magic any 330 days out of the US during any 12 month time frame. Oh, and one minute in the US or flying over it counts as a day!

Now, if I could only find a way out of the payroll (social security) taxes…

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