The Foreign Earned Income Exclusion (FEIE, using IRS Form 2555) allows you to exclude a certain amount of your FOREIGN EARNED income from US tax. For tax year 2020 (filing in 2021) the exclusion amount is $107,600. You are liable for full US tax on these types of income.

Can I claim both foreign earned income exclusion and foreign tax credit?

The first is claiming the Foreign Earned Income Exclusion on Form 2555 and the second is claiming the Foreign Tax Credit on Form 1116. The Foreign Earned Income Exclusion is only applicable to earned income, whereas the Foreign Tax Credit can be applied to both earned and unearned income.

How do I file taxes with foreign income?

Generally, you report your foreign income where you normally report your U.S. income on your tax return. Earned income (wages) is reported on line 7 of Form 1040; interest and dividend income is reported on Schedule B; income from rental properties is reported on Schedule E, etc.

How does the foreign earned income exclusion work?

The excluded amount will reduce the individual’s regular income tax, but will not reduce the individual’s self-employment tax. Also, the foreign housing deduction – instead of a foreign housing exclusion – may be claimed.

Do you have to pay tax on foreign earned income?

You are in business abroad as a consultant and qualify for the foreign earned income exclusion . Your foreign earned income is $95,000, your business deductions total $27,000, and your net profit is $68,000. You must pay self-employment tax on all your net profit, including any amount excluded from income.

Can a self employed person claim the foreign housing exclusion?

The excluded amount will reduce your regular income tax but will not reduce your self-employment tax. Also, as a self-employed individual, you may be eligible to claim the foreign housing deduction instead of a foreign housing exclusion.

What do you need to know about the foreign tax credit?

The Foreign Tax Credit is a dollar-for-dollar reduction in a taxpayer’s U.S. income tax liability for qualifying foreign income taxes paid. Not all foreign taxes qualify. They must be taxes paid on income or profit (with some exclusions, see below).