Foreign Earned Income Exclusion – Form 2555
As of 2016, section 911 of the IRC permits an exclusion of up to $101,300 of active foreign income.
This holds true if the tax home is in a foreign country and the citizen passes one of the following tests:
- Physical Presence Test: The citizen is away from the US for at least 330 days during 12 consecutive months;
- Bona Fide Residence Test: Takes into consideration a variety of factors such as citizen’s intentions, permanent residence, complex of family, social, and financial ties, etc.
Form 2350 may be filed in order to receive an extension on the filing date, so that the citizen may fit one of the two tests.
This exemption does not entitle one to Child Tax Credit or Foreign Tax Credit.
The section is only valid for earned income, such as:
Salary, bonuses, tips, fringe benefits, income for independent contractors, severance pay, sick leave, vacation days, etc.
Pensions, considered under Israeli law as earned income, are not considered so under US law.
Despite the exemption, high income earners may be subject to additional taxes such as AMT or NIIT.
This exemption is not taken into consideration in determining additional tax rates.