Foreign Earned Income Exclusion

AAA

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.

INVESTOPEDIA EXPLAINS '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.

RELATED TERMS
  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. Income Tax

    A tax that governments impose on financial income generated by ...
  5. Foreign Tax Credit

    A non-refundable tax credit for income taxes paid to a foreign ...
  6. Foreign Tax Deduction

    One of the itemized deductions that may be taken for taxes paid ...
RELATED FAQS
  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 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 >>
  3. 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 >>
  4. What's the difference between regressive and progressive taxes?

    The U.S. federal tax system and local and state tax systems are complex in that they combine progressive, regressive and ... Read Full Answer >>
  5. How is compound interest taxed?

    Compound interest is money that is earned and added to a principal balance and then earns additional interest. Adding interest ... Read Full Answer >>
  6. Is the marginal tax rate a progressive tax?

    The marginal tax rate is a type of progressive tax system that imposes a higher income tax rate on people with higher incomes, ... Read Full Answer >>
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. Taxes

    OK, So I'll Be Smarter Next Tax Time

    5 tax resolutions to start on right now for a smoother tax return next April 15.
  3. Taxes

    What To Do If You Lost Your W-2

    There's no need to panic if you don't have your Form W-2 to file taxes, there are easy ways to gain access to the missing form or file without it.
  4. Taxes

    Will Itemized Deductions Get You A Bigger Refund?

    April and taxes are due soon. If you need to file your return, you might have to decide if itemizing your deductions this year will net you a better deal.
  5. Taxes

    The First Thing You Should Do With Your Tax Refund

    Nobody likes to pay taxes, but everyone loves to get a tax refund. When the check arrives in the mail, it's hard to resist spending it on some indulgence.
  6. Taxes

    How Does An IRS Audit Work?

    It doesn't automatically mean an IRS agent will be ringing your doorbell. Here are the different types of IRS audits and how to handle them.
  7. Taxes

    Made A Mistake On Your Tax Return? Don't Panic

    You can always file an amended return. But the sooner you do it, the better.
  8. Taxes

    Business Taxes: Not Paying More Than You Have To

    If you're a small business owner, note these potential tax deductibles so that you don't pay taxes that could have been extra revenue in your account.
  9. Taxes

    How To Arrange An Installment Agreement For Taxes

    Not enough cash on hand for your April 15th tax bill? No need to panic. Here's what to do.
  10. Taxes

    Is It Smart To Get Dual Citizenship?

    Does it ever make sense to be a citizen of the U.S. and somewhere else? Yes, so you can work minus a visa – not so much, if you get drafted into the army.

You May Also Like

Hot Definitions
  1. Carrying Value

    An accounting measure of value, where the value of an asset or a company is based on the figures in the company's balance ...
  2. Capital Account

    A national account that shows the net change in asset ownership for a nation. The capital account is the net result of public ...
  3. Brand Equity

    The value premium that a company realizes from a product with a recognizable name as compared to its generic equivalent. ...
  4. Adverse Selection

    1. The tendency of those in dangerous jobs or high risk lifestyles to get life insurance. 2. A situation where sellers have ...
  5. Wash Trading

    The process of buying shares of a company through one broker while selling shares through a different broker. Wash trading ...
Trading Center