Working in a Foreign Country

thebasicLiving, working and investing in a foreign country does have its tax advantages. One of the biggest advantages and one of the most misunderstood is the Foreign Earned Income Exclusion.

With this exclusion you have the potential to deduct up to $107,600.00 (2020) of your earned income from your tax return for each year that you qualify. The most important thing is that the exclusion only applies to earned income. This is income you receive as a self-employed person or as an employee for a U.S. or foreign company. This does not include interest, dividends or capital gain income.

For the self employed person this exclusion does not include the self employment tax (Social Security). If you are married and if your spouse qualifies, there is also the possibility to exclude up to another $107,600.00 (2020) of earned income. That’s a total of $215,200.00.

This exclusion is not automatic. The first requirement of this exclusion is that you must file your tax return. The IRS can disqualify you from the exclusion just on the basis that you have not filed a tax return. Then, to make things even worse, that income becomes taxable and carries with it penalties that could equal 100% of the original tax.

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