The foreign earned income exclusion allow taxpayers to be exempt from the income they earned in a foreign country. The foreign income exclusion can only be exempt for up to a certain amount.
For the 2020 taxes (you’ll be filing in 2020), the exclusion limit is $105,900. For example, if you earned $200,000 foreign income, only the excess amount of the exclusion limit is going to be taxed by the United States. However, the type of income earned is also important. If you earned income through either one of the following, you are still liable to pay taxes.
- Capital gains
- US-sourced income
Any income that is related to the United States and its territories is going to be taxable and won’t be counted towards the exclusion limit.
How to determine how much foreign earned income is excluded?
To figure out the income you can exclude from US taxes, you must fill out Form 2555. This is a fairly long tax form that requires hours of book-keeping. You may want to file this tax form with a tax professional rather than filing it yourself. If you qualify under physical presence test though, Form 2555 is going to be relatively easy to file.
As for how to use Form 2555 to figure out the foreign earned income exclusion, head over to Part 7 of the form. However, you will need to fill out the previous part of Form 2555 to determine this. One thing that you need to pay attention to when filing Form 2555 to calculate foreign earned income exclusion is lines 38 and 39 where the number of days that qualify are entered.
Form 2555 — Foreign Earned Income for the 2021 tax season must be attached to your federal income tax return. Otherwise, the foreign earned income that normally would be excluded from your taxable income will be taxed. Prevent this from happening and avoid paying more tax than you actually liable to by filling out the 2555 properly and determine how much foreign earned income can be excluded.