The Foreign Earned Income Exclusion (FEIE) and Foreign Tax Credits Foreign Earned Income Exclusion (FEIE)

U.S. citizen living abroad may qualify to exclude their foreign earnings from income up to an amount that is adjusted annually for inflation ($126,500 for 2024). This exclusion is for "earned income" only therefore disability payments, social security income and pensions income do not qualify and to be eligible you must meet foreign residency requirements. 

The Bipartisan Budget Act of 2018 allows US citizens, notably contractors or employees supporting the US Armed Forces in designated combat zones, to qualify for the FEIE.  The legislation changed the tax home requirement for eligible taxpayers, allowing them to claim the FEIE even if their “abode, or home, is in the United States. Prior to the passage of this law, these employees, contractors, etc. who maintained an “abode” in the United States, were unable to claim the FEIE.  The justification being that their home is in the US and not in a foreign jurisdiction given the temporary, contract or short-term nature of their employment. Although abode is not defined in the IRS code or regulations, it has been defined by various courts as one’s home, habitation, residence, domicile, or place of dwelling.

There is a plethora of reason for which a US citizen living overseas who is not supporting the US Armed Forces may continue to maintain an abode in the United States while working overseas. As businesses and commerce have gone global, the ease with which individuals can “pick up and go” to take advantage of employment and financial opportunities has increased. Employees are now more mobile than ever. Some employees may not be able, or may not want, to relocate their home or family during their employment for a number of reasons; safety issues in the country of employment, family member health/disability issues, schooling and educational issues, special needs children, eldercare, etc.

These reasons and others an employee may keep an “abode” or home in the United States to manage their personal and family needs while they are working overseas and paying taxes in a foreign jurisdiction.  Forcing a strict adherence to the concept of “abode” puts these individuals at a disadvantage and limits their employment options. The abode concept is outdated and no longer fits with the way that individuals live and work in the 21st century.

Foreign Tax Credits

The US expects foreign countries to tax their income similarly to the US. The US gives taxpayers nine different categories of income to claim foreign tax credits on and limiting each to approximating what the US would have considered a tax. The categories often overlap significantly due to their vagueness and/or the preparer-by-preparer interpretation.

For example, wealth taxes imposed by foreign countries do not qualify as a tax credit, and in some cases, it is unclear whether they can be used as an itemized deduction. Certain social taxes used in many European countries also do not qualify.  Many foreign jurisdictions do not use income tax as a primary source of tax revenue, relying on value added taxes (VAT) to raise taxes.