Understanding the foreign earned income exclusion and its application is crucial because it involves more than just filling out a form; it requires a deep knowledge of eligibility criteria, including the bona fide residence and physical presence tests.
Below, you’ll find a few of the top questions from a recent webinar on the topic and their accompanying answers. If you choose to attend the on-demand version of this webinar, you can access the full recording and the entire list of Q&As.
Q: Is the foreign earned income exclusion amount in U.S. dollars?
A: Yes, the foreign earned income exclusion is calculated in U.S. dollars and is adjusted annually for inflation.
Q: Is rental income considered for the foreign earned income exclusion?
A: No, foreign rental income cannot be excluded under the foreign earned income exclusion as it is considered passive income, not earned income.
Q: Do you need to pay taxes in a foreign country to meet the bona fide residence test?
A: Not necessarily. No single factor is controlling. All factors must be considered to determine if the taxpayer qualifies.
Q: What if someone owns a home in the U.S. but rents it out?
A: One of the requirements for the foreign earned income exclusion is that the taxpayer’s tax home is in a foreign country. Owning a home in the U.S. does not automatically establish an abode in the U.S., especially if it is rented out.
To learn more about tackling Form 2555 and the foreign earned income exclusion, you can watch our on-demand webinar. NATP members can attend for free, depending on membership level! If you’re not an NATP member and want to learn more, join our completely free 30-day trial.
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Information included in this article is accurate as of the publish date. This post is not reflective of tax law changes or IRS guidance that may have occurred after the date of publishing. All taxpayer circumstances are different, and NATP recommends contacting research services if you have specific questions about your clients’ tax situations.