If you live overseas, you may have heard of agreements between the United States and foreign count
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My name again, for those who are just ing us is Sherry Saucerman. I am a stakeholder liaison with the IRS and I'll be your moderator for today's webinar. It's slated for minutes, but in order to answer your questions, we may extend a little past the minute mark. Before we begin, if we have anyone in the audience with the media, please would you send us an e-mail message to the address provided on the slide. In that e-mail, if you would, please include your contact information and the news publication that you're with, that way, our media relations or our stakeholder liaison staff can assist you or answer any questions you might have.
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Now, moving along with our to our presentation, let me introduce today's speakers. As technical specialists, they both facilitate and coordinate the identification, development, and resolution of international issues. Both have expertise with tax issues of non-resident aliens and U.
And with that, I'm going to turn it over to Bethany to begin the presentation. And I want to add my welcome to everyone who's attending today, and I want to say thank you for attending today's webinar. During our discussion today, we will be defining foreign-earned income, explaining the concept of tax home as it applies to the foreign-earned income exclusion, summarizing the bona fide residence and the physical presence tests, and we will specify the effect of the foreign-earned income exclusion on other credits and deductions.
And I think the very first question that we received today had to do with that. Someone was asking what were the basic requirements for American citizens relative to the taxation of their foreign income? And in response to that, some of that other types of income besides foreign-earned income are probably beyond the scope of this webinar today, but I do want to explain to that person that the primary responsibility is for you to report your worldwide income to the IRS as a U. So that is the most basic requirement. And as we will find out today, if you live and work in a foreign country, then you may be eligible to exclude your foreign-earned income under the provisions that we are discussing today.
And you may also be eligible to exclude or deduct certain foreign housing cost amounts.
I want to make it clear, and this answers another question that has already come in, the exclusion is available only to U. And another member of the audience had just been asking via the question feature about a client of theirs who's a Green Card holder and is currently in the process of becoming a U.
If that is the case, they certainly meet the requirement of being a resident alien. A person with a Green Card is a lawful permanent resident of the United States and as such is considered a U. And so, such an individual, if they meet all the qualifications, could in fact be eligible to claim the foreign-earned income exclusion. I also want to point out that it's not available to non-resident aliens. The foreign-earned income exclusion is claimed on Form or EZ. And as Sherry mentioned earlier, there is a materials tab that has those forms attached to this presentation if you needed to pull it up and look at it, which might not be a bad idea.
Streamlined procedure: which years to file?
The maximum foreign-earned income exclusion is indexed each year for inflation. I also want to make it clear that if you make the choice to exclude foreign-earned income, then you need to exclude all of your foreign-earned income up to that threshold amount that I just mentioned, in other words, the lesser of the threshold amount or what you actually earned. In addition to the foreign-earned income exclusion, you may also be able to exclude or deduct foreign housing expenses in excess of a base amount and subject to a limit. And more information about the base amount and the limit are contained in the Form and its instructions.
Now the housing exclusion applies to employees because it applies only to amounts that are considered paid for with employer-provided funds, which would be your wages, your salaries, any allowances you might receive, any form of compensation that you get from your employer. So, the foreign housing exclusion is applicable to employees.
What are totalization agreements and how do they affect your us expat taxes?
And I also want to point out, you may get a housing allowance and let's say your housing allowance is 10, and let's say that your housing expenses are 20, well, it doesn't have to be only funds that were earmarked for housing, so obviously if you have salary enough to cover the 20, in housing expenses, then subject to debate and a limit, you would be able to exclude those as an employee. The housing deduction on the other hand applies only to amounts that are paid for with self-employment earnings.
So, if you're self-employed individual, you don't take the housing exclusion instead you would be taking the foreign housing deduction. And when we talk about housing costs or housing expenses, that includes any reasonable expenses that you actually paid or incurred for your housing in a foreign country. So that would include things like rent, any utilities that you had to pay there, renter's insurance or if you own a home, homeowner's insurance, and residential parking costs.
Housing expenses do not include the principal amount of mortgage payments, home improvements, the cost of household help, cable television, or the cost of purchasing furniture or appliances and furnishings for your residence in a foreign country. And in order to claim the housing exclusion or the housing deduction, you would complete Part 5 sorry, Part 6 of Form To claim the foreign-earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, there are certain requirements that you need to meet. First of all, you have to have foreign-earned income.
That's the most basic requirement. It's a foreign-earned income exclusion, you would've had to have had foreign-earned income. Your tax home has to be in a foreign country. You have to meet either the bona fide residence or the physical presence test. And you have to make a valid election.
Foreign earned income exclusion - feie
OK, Sherry, it looks like this might be a good time for our first polling question for those of you who are taking this course for continuing professional education. So, our first polling question is, which of the following is a requirement for an individual to claim the FEIE? And that stands for foreign-earned income exclusion. Please take a minute, click in the radio button that you believe most closely answers this question.
Do i qualify for the earned income credit?
So based on what Bethany has been saying, do you think the correct is A, the individual must pay foreign taxes on income earned outside the United States; B, the individual must meet either the bona fide residence test or the physical presence test; C, the individual must be in a foreign country for at least six months during the year; or D, the individual cannot travel to the United States during the tax year. Give you a couple more seconds to make your selection. Which of the following is a requirement for the individual to claim the foreign-earned income exemption exclusion?
We're going to stop the polling now. And we will share the correct answer on the next slide. And the correct response is B, individual must meet either the bona fide residence test or the physical presence test. I see that 86 of you 86 percent of you responded correctly.