Foreign Earned Income Exclusion


DEFINITION of 'Foreign Earned Income Exclusion'

The amount of income earned from a foreign source that is excludable from domestic taxation. The foreign earned income exclusion can only be claimed by those who meet the foreign residence or physical presence tests, who have a tax home in a foreign country, and have foreign income.

Tax payers wishing to exclude foreign earned income must make an election to do so.

BREAKING DOWN 'Foreign Earned Income Exclusion'

During the 2007 tax year, the maximum foreign earned income exclusion was $85,700. If the election is made, the taxpayer must proactively elect to use this exclusion (on an moving-forward basis); this exclusion is not assigned automatically.

The exclusion is elected on Form 2555. Furthermore, taxpayers who claim this exclusion cannot deduct any business expenses incurred relative to the foreign income, make domestic retirement plan contributions of any kind that are based on this income or claim the foreign tax credit or deduction for any taxes paid to a foreign government on this income.

  1. Expatriate

    An individual living in a country other than their country of ...
  2. Worldwide Income

    The aggregation of a taxpayer's domestic and foreign income. ...
  3. Physical-Presence Test

    Similar to the bona fide foreign residence test, the physical-presence ...
  4. Earned Income

    Income derived from active participation in a trade or business, ...
  5. Income Tax

    A tax that governments impose on financial income generated by ...
  6. Expense

    1. The economic costs that a business incurs through its operations ...
Related Articles
  1. Taxes

    Give Your Taxes Some Credit

    A few tax credits can greatly increase the amount of money you get back on your return.
  2. Economics

    Explaining Fair Market Value

    Fair market value is the price at which a buyer and seller are willing to exchange a good.
  3. Taxes

    What IRS Form 1023 Is Used For

    To be treated as a tax-exempt organization, start by filling out this form.
  4. Taxes

    Late with Your Taxes? Grab IRS Form 4868

    Fill out this form to get a few more months to file your tax return. But remember, April 15 is still the payment due date if you owe taxes.
  5. Taxes

    What's a Tax Shield?

    A tax shield is a deduction, credit or other means used to reduce the amount of taxes an individual or business owes to the government.
  6. Taxes

    What's an Indirect Tax?

    An indirect tax is levied on goods or services rather than on an individual or a company.
  7. Taxes

    Understanding Excise Taxes

    An excise tax is an indirect levy charged for the sale or use of a particular item.
  8. Taxes

    Understanding the W-2 Form

    The W-2 Form is a standard Internal Revenue Service (IRS) form that employers are required to furnish employees at the end of each year.
  9. Taxes

    IRS Refund Lost? Here's What to Do

    Don't panic. There are a number of reasons your refund might be delayed – and solutions for each.
  10. Economics

    What's a Deductible?

    With insurance, a deductible is the amount of money the insured pays out-of-pocket before the insurance company pays for the loss.
  1. I am a non-U.S. citizen living outside the U.S. and trading stocks through a U.S. ...

    The tax implications for a foreign investor will depend on whether that person is classified as a resident alien or a non-resident ... Read Full Answer >>
  2. What does the law say about non-U.S. citizens buying stocks of U.S. companies? Are ...

    The law is very fuzzy on the matter of who may own U.S. securities and for what purpose. The U.S. follows the common law ... Read Full Answer >>
  3. What is the purpose of a "repatriated tax break", and why is it so controversial?

    In 2004, Congress passed the American Jobs Creation Act to create new jobs in an effort to boost the economy. One of the ... Read Full Answer >>
  4. Do financial advisors prepare tax returns for clients?

    Financial advisors engage in a wide variety of financial areas, including tax return preparation and tax planning for their ... Read Full Answer >>
  5. What is the difference between comprehensive income and gross income?

    Comprehensive income and gross income are similar, but comprehensive income is a specific term used on a company's financial ... Read Full Answer >>
  6. What tax breaks are afforded to a qualifying widow?

    The tax breaks accorded to qualifying widows or widowers include being able to use a tax filing status that allows for a ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Term Deposit

    A deposit held at a financial institution that has a fixed term, and guarantees return of principal.
  2. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  3. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  4. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  5. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
  6. Normal Profit

    An economic condition occurring when the difference between a firm’s total revenue and total cost is equal to zero.
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!