This video shares some facts about the 2014 Overseas Earned Income Exclusion, also known as the Foreign Earned Income Exclusion.
2014 Overseas Earned Income Exclusion
Up to a maximum of 99,200 for 2014
To qualify you must either be a Bona Fide Resident or meet the Physical Presence Test
The Physical Presence Test is the more common of the two methods for qualification for the Foreigned Earned Income Exclusion.
Overseas Earned Income Exclusion Physical Presence Test – 330 day rule
To qualify to take any credit. You must have foreign earned income and be overseas 330 days out of any 365 day period.
It can be from June 1, 2014 to May 31, 2015
It can be a calendar year.
It can run from Oct 13, 2012 to Oct 12,2013
The key is you cannot be back in the United States for more than 35 days within the 365 day period you choose.
You can be in a different county.
E.g., You can work as a contractor in Afghanistan for 310 days, then you can go to Germany for 20 days before coming home.
Thus, you were overseas for 330 days within a 12 month period, therefore you qualify for an Foreign Earned Income Exclusion.
If you don’t meet this test you do not qualify for any exclusion!
Let’s use a similar example
E.g., you work as a contractor in Afghanistan for 325 days. You come straight home. You were only out of the states for two additional days due to travel (327 total).
You come back home without leaving the states again that year.
You fail to meet the 330 day rule thus you do not quality for any exemption.
If, however, you come back and get your wife and go to the Caribbean for a week you would have 330 days out of the states within the 12 month period, and thus you would qualify.
The key, the 330 day rule is all or nothing, either you qualify or you do not.
Second Part – Foreign Earned Income Exclusion Physical Presence Test – Days within the Calendar Year
Determining the amount of exclusion
The amount of exclusion is prorated based on the number of days within your 365 day period that fall within the calendar year for the tax return you are filing.
You work as a contractor from July 1, 2014 to December 31, 2015. During that period you came home three times.
17 days in Dec 2014
14 days in March 2015
15 days in August 15
You would get roughly half the exclusion for 2014.
99,200 x ½ = $49,600
Your 12 month period for 2014 would run approximately from July 1, 2014 to June 30, 2015.
You were back in the states only 31 days during that time frame, so you meet the physical presence test.
Since only six months of the 12 month (365 day) period falls in 2014, you have to prorate the exclusion 99,200 x ½ = $49,600.
However, you would get entire exclusion for 2015.
Using the same example, you would be overseas from Jan 1, 2015 to Dec. 31, 2015.
Between those dates, you are only back in the states for 29 days.
Since all twelve months of the period fall in 2015, you can take the full exclusion ($100,800) for 2015.
Notice, your 12 month periods can overlap.
For 2014 taxes you use July 1, 2014 to June 30, 2015 to meet the qualifications.
For 2015 you use Jan. 1, 2015 to Dec. 31, 2015 to get the full exclusion.
Thus, you use Jan – June 2015 to meet the 330 day rule for both years.
This is okay – 12 month periods can overlap!
Foreign Earned Income Exclusion: Other notes
Any taxable income you do have is taxed at the higher rates.
Example: Let’s say you have $130,000 in income. You qualify for a $90,000 foreign earned income exclusion based on the days you were overseas during a calendar year and you have $20,000 in itemized deductions. Thus, you have $20,000 in taxable income. Assuming you are Married Filing Jointly, that income is taxed at the 25% bracket rather than the 10 and 15% brackets.
Furthermore, you must report your income and then take the exclusion. If not, the IRS will get a copy of the W-2 and assume all the income is taxable.
Example: I have seen a couple think it is not taxable; therefore, they just don’t report the foreign income. Due to the wife’s moderate income the software they used showed they qualified for earned income credit. The got a huge refund. They ended up having to pay it back.
While foreign earned income is non-taxable for federal income tax purposes, it is added back in to determine whether you qualify for earned income credit, etc.
This is different from military combat pay which is not added back to determine the credit.
Overseas Earned Income Exclusion Summary and Conclusions:
You must be overseas 330 days out of a 365 day period to qualify for a credit at all. The 365 day period does not have to be a calendar year.
The credit is prorated based on the number of days in your 365 day period that falls within the calendar year for a specific tax year.
Two different 365 day periods can overlap.
You must report the income and take the exclusion. It affects other parts of your return. You cannot just ignore the W-2!
Contact us for more information about the Foreign Earned Income Exlcusion.
You can email or fax us your information and we would be happy to prepare a return for you even if you are overseas.
Our office is near Fort Hood, TX. I have prepared many Foreign Earned Income Exclusions.