Foreign Earned Income Exclusion (What Qualifies?)

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If you live and work abroad, you may qualify to exclude all or part of your foreign earned income from United States income tax. Foreign earned income is defined as wages, salaries, professional fees, and other amounts received as compensation for personal services performed in a foreign country. The place where you perform the services is what defines your income as foreign, not where or how you are paid. For instance, income received for personal services performed in France is foreign earned income, even if the employer is American and your pay is deposited in an American bank. Wages paid by the U.S. government to its employees are not eligible for the exclusion. However, amounts paid to independent contractors by the U.S. government may be eligible for the exclusion. You must have a tax home in a foreign country and meet either the bona fide residence test of the physical presence test. These are explained in Foreign Earned Income Exclusion (Who Qualifies?).

Foreign earned income does not include such items as interest, dividends, pensions, annuities, or amounts attributable to certain employee trusts. If you are self-employed, and both capital investment and personal services are factors in producing your income, your earned income is the smaller of the value of your personal services or 30% of net profits. Additional rules are described in Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad.

Your net self-employment income is generally subject to self-employment tax even if it is excluded for income tax purposes. However, if it was earned in a country that has a social security agreement with the United States, which is called a totalization agreement, it may be exempt from U.S. social security taxes, including the self-employment tax.

If you violate U.S. restrictions that prohibit travel to certain countries, your foreign earned income from such a country does not qualify for exclusion. Refer to Publication 54, for current travel restrictions. For related information, refer to Topics Foreign Earned Income Exclusion (General) and Foreign Earned Income Exclusion (Who Qualifies?).

If the information you need is not addressed in Publication 54, you may call the IRS International Tax Law hotline. The number is (215) 516-2000. This is not a toll-free number.


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