All posts by Derland Bahr CPA, Inc

Blog, Tax Topics

Foreign Earned Income Exclusion

Note: I have updated some numbers and dates in the written blog as of November 2024. The video was made in 2015.

Overseas Earned Income Exclusion

This video shares some facts about the Foreign Earned Income Exclusion.

2024 Foreign Earned Income Exclusion

Up to a maximum of 126,500 for 2024

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.

Foreign 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, 2024 to May 31, 2025

It can be a calendar year.

It can run from Oct 13, 2023 to Oct 12,2024

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.

Example:

You work as a contractor from July 1, 2024 to December 31, 2025.  During that period you came home three times.

17 days in Dec 2024

14 days in March 2025

15 days in August 2025

You would get roughly half the exclusion for 2024.

126,500 x ½ = $63,250

Your 12 month period for 2024 would run approximately from July 1, 2024 to June 30, 2025.

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 2024, you have to prorate the exclusion 126,500 x ½ = $63,250.

However, you would get entire 126,500 exclusion for 2025.

Using the same example, you would be overseas from Jan 1, 2025 to Dec. 31, 2025.

Between those dates, you are only back in the states for 29 days.

Since all twelve months of the period fall in 2025, you can take the full exclusion ($130,000) for 2025.

Notice, your 12 month periods can overlap.

For 2024 taxes you use July 1, 2024 to June 30, 2025 to meet the qualifications.

For 2025 you use Jan. 1, 2025 to Dec. 31, 2025 to get the full exclusion.

Thus, you use Jan – June 2025 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 $140,000 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 $29,200 standard deduction. Thus, you have $20,800 in taxable income.   Assuming you are Married Filing Jointly, that income is taxed at the 22% bracket rather than the 10 and 12% 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.

Foreign 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 Exclusion.

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 Cavazos, TX. I have prepared many Foreign Earned Income Exclusions.

Phone 254-432-5724

Note: If you call our office, we can give you our email address and send a link to our client portal so you can upload your files securely.

Blog, History of Taxation in US

History of Taxation in US: Beginnings until the Great Depression

history of taxation in the us - beginnings through great depression

There is a lot of discussion of tax rates in the United States, especially every four years as an election approaches.  I remember when I was taking an accounting ethics course at Austin Community College, one student said that our tax structure is not as progressive as it used to be and the teacher quickly agreed with him.  He was implying that the rich were not paying their fair share.  On the other hand, others talk about the high tax rates on the rich stifling business and growth.   I did not intend to argue one way or the other, but just give a summary of the federal income tax in the United States and let readers draw their own conclusions.  However, after going through the facts myself, I felt compelled to offer up some observations at the end.

The first tax in the United States was enacted during the civil war (to help with war efforts in the North), but it was repealed after the war was over.  If you are reading this and one of your ancestors forgot to file their return, you can assess the 1864 federal income tax return here.   It was only only for people with annual incomes above $600, which was a lot back in 1864.

Later on income taxes were ruled as unconstitutional in Pollock v. Farmers’ Loan & Trust Co.   Thus, an amendment became necessary in order to enable Congress to levy taxes.   The 16th Amendment to the Constitution was passed in 1913.  In 1913, taxes for individuals ranged from 1% to 7%.  However, most individuals did not pay taxes, since most individuals did not make $3000, the amount of the personal exemption.  The seven percent bracket was only for those who made over half a million dollars a year, which was a lot of money in 1913.

In 1916 the maximum tax rate went up to 15%, but that was people making over $2 million a year (again a huge of money in 1916).

However, in 1917 with WWI the maximum tax rate escalated to 67% for those making over $2 million a year.  It was 65% for incomes over $1 million a year and 50% for those making over $300,000 per year.  As you can see rates went up dramatically and affected more people.  However, most families still did not make $5000, the amount of personal exemption for that year.  So for all practical purposes the income tax was a tax on the rich.

The maximum tax rate went up to 77% in 1918, and then dropped down to 73% the next year.  It dropped down to 58% in 1922.  It dropped down to 46% in 1924, but the top rate only applied to anyone making over $500,000.   Again, not many people made a half a million dollars in 2024.  The next year it dropped down to 25%, but this time it applied to anyone making over $100,000.  Granted that was still a whole lot of money in the 1920’s.  Families making less than $5000 were not required to file, and that applied to a whole lot of people in 1925.   The lowest tax bracket was only 1.5%.

Tax brackets remained pretty much the same from 1925 through 1931.

To Continue: See Great Depression through WWII

Blog, History of Taxation in US

History of Taxation in the US: Great Depression through WWII

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history of taxation in the us - great depression through wwii

Then, in 1932 during the great depression the highest rate shot up to 63%, which was for people making over a million dollars.  Obviously, there were not a lot of people making over a million dollars a year during the great depression.  Still, it was 50% for those making over $88,000.  And the lowest tax bracket went up to 4%.  Of course, those who had lost their jobs were not paying anything.

Again tax brackets remained the same until 1936 when the highest rate went up again to 79% for people making over $5,000,000.    Still, it was 70% for people making over $300,000 and 59% for those making over $90,000.  The lowest bracket remained at 4%.

In 1940 tax rates remained the same, but the thresholds were lowered for those having to file returns.   Those who were single had to file if their income was over $800.  Those who were married had to file if their income was over $2000.

Once again, tax brackets remained the same until 1941 when the top bracket went up to 81% (for those making over $5 million) and the bottom bracket went up significantly to 10%.   Furthermore, any couple making over $1,500 had to file a return.

Then in 1942 the top bracket went up to 88%, which applied to anyone making over $300,000.  The lowest tax bracket was raised to 19%.  Obviously, this is during the time of WW2 when the United States needed a lot of money to support the war effort.   A couple of things to note about this.  One is that the highest tax bracket started a lot lower.  Granted, few households were making over $300,000 in 1942.   Second, the lowest tax bracket was a lot higher at close to 20%.  Thus, there was more of a shared responsibility during war time by all of those making over the exemption amount which was again reduced $1,200 for married couples.

The top tax rate jumped again in 1944, this time to 94% and applied to anyone making over $200,000.  The lowest rate also went up to 23%.

To continue: See Baby Boom years through Ronald Reagan

Blog, History of Taxation in US

History of Taxation in US: Baby Boom years through Ronald Reagan

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history of taxation in the us - baby boom years through ronald reagan

After the war was over in 1946, the top rate dropped slightly to 91% and the bottom rate dropped slightly to 20%.  It remained pretty constant until 1964.  It had a slight increase in rates in the early 50’s, but dropped back down to the 91% rate for the highest bracket and 20% for the lowest bracket.  One other thing that did happen during these years is that brackets were separated into Single, Head of Household, and Married Filing Separately.  Before that time there were different deductions and exemptions for married, single, etc.; but the tax brackets applied across the board.  When the changes were made, the highest tax bracket applied to Single and Married filing separately at $200,000.  It applied to Head of Household for those making over $300,000.  And it applied to Married Filing Jointly, if they were making over $400,000.

In 1964 the top tax bracket dropped to 77% (still very high by today’s standards) and the bottom tax bracket went down to 16%.   They dropped again to 70% and 14% respectively in 1965, where they remained until the Reagan administration during the 1980’s.  So for more than 15 years they remained pretty constant at 70% for highest income taxpayers and 14% for the lowest income taxpayers.

In 1982, the highest bracket dropped to 50% and the lowest bracket dropped to 12%

Note: starting in 1977 there was actually a 0% bracket, which basically was a way of preventing lower income earners from being subject to tax. Basically, the $3,400 of what would otherwise be taxable income became non-taxable.  I did not include it because you are not paying tax in the 0% bracket.

In 1987, the top rate was lowered to 38.5% and the lowest rate was 11%.  Another significant thing that happened in that year is that the number of brackets was reduced to five.  This may not sound significant now, but there were 15 tax brackets in 1986 and many more than that during much of our history.  For instance, in 1977 there were over 30 different tax brackets for people filing head of household.

Then in 1988, tax brackets were reduced to two.   Lower income taxpayers were paying 15% (a slight increase).  The top (and only other tax bracket) was 28.5%.  The 28.5 percent bracket started at around $30,000 for married filing jointly taxpayers.   Keep in mind, this was around the time the first President Bush made his famous “read my lips” statement that there would be no new taxes.

Note, this was the lowest upper limit rates since before World War I.  However, the highest bracket began a lot lower.  The 28.5% bracket was higher than what those making around $30,000 were paying during and just after WW1.  For instance, people with taxable income between 30,000 and 32,000 (I told you there were a lot of tax brackets!) were only paying 22% during 1920.  That is, even though the highest rate was much higher right after WW1, it only applied to those making over $1,000,000.   In all, the late 80’s and the early 90’s is the closest we ever came to a flat tax.

To Continue: See Modern Day and Conclusions