U.S. citizens and resident aliens must report the income they earn outside of the U.S. annually. There are, however, certain credits and exclusions you can apply to significantly reduce or eliminate your owed taxes. The two main ones are the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC).
Who should use the FEIE?
To use the FEIE, you must be:
- Physically present in another country for 330 days of the year, or
- A “bona fide resident” of the country
TurboTax will figure out if you’re eligible for this exclusion or you can use this tool from the IRS.
The FEIE allows you to exclude a significant portion of your income. In 2020, this amount is $107,600, and it’s adjusted annually for inflation. There’s also a housing allowance component of the FEIE that may help you exclude additional income.
Who should use the FTC?
The FTC is beneficial for you if you:
- Live and work in a foreign country with income taxes (foreign income taxes are often higher than those in the U.S.)
- Have U.S. citizen children, aged 16 or younger, with social security numbers (You’ll be eligible for the child tax credit)
- Haven’t previously used the FEIE
- Contribute to Individual Retirement Accounts (IRAs) or Roth IRAs
- Need to show a positive number for Adjusted Gross Income (AGI) on your tax return