What are some common mistakes to avoid when filing for the FEIE?

1 Not meeting the qualification tests

To claim the FEIE, you need to pass either the bona fide residence test or the physical presence test. The bona fide residence test requires you to establish a permanent and continuous residence in a foreign country for a full tax year. The physical presence test requires you to be physically present in a foreign country for at least 330 days in a 12-month period. You cannot claim the FEIE if you do not meet either of these tests, even if you have foreign income or pay foreign taxes.

2 Not filing Form 2555 or Form 2555-EZ

To claim the FEIE, you need to file either Form 2555 or Form 2555-EZ with your US tax return. Form 2555 is a detailed form that asks for information about your foreign income, expenses, housing, and tax situation. Form 2555-EZ is a simplified form that you can use if you meet certain criteria, such as having no self-employment income or foreign housing expenses. You cannot claim the FEIE without filing one of these forms, even if you qualify for the exclusion.

3 Not reporting all of your foreign income

The FEIE only applies to your foreign earned income, which is income that you receive for services performed in a foreign country. It does not apply to other types of foreign income, such as interest, dividends, capital gains, pensions, or social security. You need to report all of your foreign income on your US tax return, even if it is not subject to the FEIE. You may be able to reduce or eliminate your US tax on some of these income sources by claiming other benefits, such as the foreign tax credit or the tax treaty provisions.

4 Not adjusting your exclusion amount

The FEIE is not a fixed amount that you can exclude from your US taxes every year. It is subject to annual adjustments based on inflation and other factors. For 2020, the maximum amount of the FEIE is $107,600 per person. However, your actual exclusion amount may be lower depending on your foreign income, your filing status, and your prorated days in a foreign country. You need to calculate your exclusion amount every year using Form 2555 or Form 2555-EZ and report it on your US tax return.

5 Not keeping proper records and documentation

Claiming the FEIE can be a complex and challenging process that requires you to provide proof and evidence of your foreign income and residence. You need to keep proper records and documentation of your foreign income, such as pay stubs, invoices, contracts, and bank statements. You also need to keep track of your travel dates, locations, and purposes, as well as any documents that show your intention and ties to a foreign country, such as visas, leases, utility bills, and memberships. You may need to present these records and documents to the IRS if they audit or question your FEIE claim.

6 Not using a foreign earned income exclusion calculator

One of the easiest and most convenient ways to avoid making mistakes when filing for the FEIE is to use a foreign earned income exclusion calculator. A foreign earned income exclusion calculator is an online tool that helps you determine if you qualify for the FEIE, how much you can exclude from your US taxes, and how to fill out Form 2555 or Form 2555-EZ. A foreign earned income exclusion calculator can save you time, money, and hassle by simplifying and streamlining the FEIE process.

7 Here’s what else to consider

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