Going with a theme from the last few blogs, about foreign disclosures and earning/receiving foreign income sources, another question that concerns US citizens (and resident aliens) what if such a persons has a job aboard? Remember, any US citizen (or resident alien) is taxed on all of his/her worldwide income. There are two choices; the first of course is to claim the foreign tax credit, as explained in the previous blog, the second, is to claim the foreign earned income exclusion.

First, foreign earned income only applies to income sources that a person actually earns, which is from an actual job, or occupation, including being a self-employed person. Thusly, any investment based income (e.g. interest, dividends, rental income, pensions, etc.) would not qualify for the foreign earned income.

Secondly it is an exclusion that a person would subtract from his total income, and thus would not be subject to the federal income tax. However if the foreign income is not self-employment income, the federal self-employment tax would still apply. In other words, the foreign earned income exclusion only applies to the federal income tax.

Thirdly, a person has to be either a “bona fide resident” (or in other words a true resident) of a foreign nation, or be “physically present” in a foreign nation, while earning and/or receiving such foreign income. In order to be “physically present” in a foreign nation, to qualify for the foreign earned income exclusion, must be in a foreign nation for at least 330 full days, within a 12 consecutive months period. This means that the 330 day requirement does not have to be from January 1 – December 31 of one year, it could mean that the residential period could start from any date of the year, a person has to count 12 months from that date, to see if the 330 day requirement has been meet.

Fourthly, the maximum amount a person can claim for the foreign earned income exclusion for 2014 is $99,200 (for 2015 the maximum amount is $100,800), and this maximum exclusion is apportioned based on the number of days a person is in a foreign nation.

Finally, just a warning, if a person who is a US citizen working aboard and claiming the foreign earned income exclusion and still holding himself/herself as a California resident, it would be a major problem for California tax consequences. Because California does not recognize the federal earned income exclusion, so such foreign income would be subject to California income tax so contact your accountant for advice..

So, if you are US citizen (or resident alien) working aboard, please contact us at [email protected], and we would be more than happy to assist you in claiming the federal foreign earned income exclusion.